Assessee's Appeal Partly Allowed, Tribunal Rejects TP Officer's Comparables

The appeal filed by the assessee was partly allowed. The Tribunal directed the Assessing Officer to verify the returned income and rejected the comparables selected by the Transfer Pricing Officer for TP adjustment, deciding in favor of the assessee on significant grounds. Additional evidences were admitted under Rule 29, and the issue of interest levy under section 234 was deemed consequential. The order was pronounced on 18th October 2017.

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Issues Involved:
1. Mistake in considering the returned income of the assessee.
2. Transfer Pricing (TP) adjustment under the head provision of Application Engineering Service (AES).
3. Admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963.
4. Levy of interest under section 234 of the Income Tax Act.

Detailed Analysis:

1. Mistake in Considering the Returned Income:
The first effective ground of appeal (GOA-2) addressed an error in considering the returned income of the assessee at Rs. 5,60,97,490/- instead of Rs. 5,56,17,488/-. The Tribunal directed the Assessing Officer (AO) to verify the facts and pass necessary orders if the claim made by the assessee is found factually correct. This ground of appeal was decided in favor of the assessee, in part.

2. TP Adjustment under the Head Provision of Application Engineering Service (AES):
The next effective ground of appeal (GOA 3-7) dealt with a TP adjustment of Rs. 78.71 lakhs under the head AES. During the TP proceedings, the Transfer Pricing Officer (TPO) found that the assessee had adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) using operating profit to operating costs (OP/OC) as the Profit Level Indicator (PLI). The TPO selected three additional comparables: Acropetal Technologies Ltd. (ATL), Holtech Consulting Private Ltd. (HCPL), and Cather Consulting Engineers Ltd. (CCEL), which had significantly higher margins. The TPO proposed an addition of Rs. 78.71 lakhs, which was upheld by the Dispute Resolution Panel (DRP).

The assessee contended that the TPO/DRP erred in selecting comparables based on an incorrect appreciation of the functional asset and risk profile. The Tribunal found that there was no functional comparability between the assessee and the comparables selected by the TPO. Specifically:
- CCEL: Involved in providing comprehensive consultancy services in power, oil, and gas sectors. The Tribunal found no functional comparability with the assessee, whose main business was sales support of marine equipment for group companies.
- ATL: Had extraordinary events (mergers/amalgamations) impacting its financials, making it an invalid comparable.
- HCPL: Engaged in providing comprehensive services from concept to commissioning for various projects, with no segmental data available for comparison. The Tribunal found no similarity between the functions of the assessee and HCPL.

The Tribunal concluded that all three comparables selected by the TPO and approved by the DRP should be rejected for arriving at the Arm's Length Price (ALP) of the assessee's international transactions. Consequently, the second effective ground of appeal (GOA 3-7) was decided in favor of the assessee.

3. Admission of Additional Evidences:
The assessee requested the admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963, arguing that these documents would prove that the assessee had received services from its Associated Enterprises (AEs). The Tribunal admitted the additional evidences, stating that they would be useful in deciding the issue regarding TP adjustment made under the head corporate fees and that the assessee was prevented from submitting them earlier by a reasonable cause.

4. Levy of Interest under Section 234:
The last ground of appeal dealt with the levy of interest under section 234 of the Income Tax Act, which was of a consequential nature and hence not adjudicated by the Tribunal.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the AO to verify the returned income and rejected the comparables selected by the TPO for TP adjustment, thereby deciding in favor of the assessee on significant grounds. The additional evidences were admitted, and the issue of interest levy under section 234 was deemed consequential. The order was pronounced in the open court on 18th October 2017.

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