Tribunal overturns tax adjustments, faults AO for errors in transfer pricing & expense disallowances

The Tribunal allowed the appeal, directing the deletion of transfer pricing adjustments, disallowance under Section 14A, disallowance of lease rental payments under Section 40A(2)(b), and restriction of allowance under Section 40(a)(ia). The Tribunal found errors in the AO/TPO's actions, including disregarding appropriate benchmarks, not allowing economic adjustments, and making disallowances without proper analysis. The order was pronounced on 25.09.2018.

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Issues Involved:

1. Validity of the Assessment Order.
2. Transfer Pricing Adjustments.
3. Disallowance under Section 14A.
4. Disallowance of Lease Rental Payments under Section 40A(2)(b).
5. Restriction of Allowance under Section 40(a)(ia).

Detailed Analysis:

1. Validity of the Assessment Order:

The assessee challenged the correctness of the assessment order dated 28.09.2012 framed under section 143(3) read with section 144C of the Income-tax Act, 1961. The assessee contended that the order was vitiated as the Dispute Resolution Panel (DRP) erred in confirming the addition made by the Assessing Officer (AO) to the appellant’s income.

2. Transfer Pricing Adjustments:

The AO/TPO made an addition of Rs. 313,76,541 by holding that the appellant’s international related party transactions did not satisfy the arm’s length principle. The key points of contention included:

- Disregarding the arm’s length price and the benchmarking process carried out by the appellant.
- Rejecting the comparability analysis and conducting a fresh comparability analysis arbitrarily.
- Including companies that do not satisfy the test of comparability and rejecting similar companies.
- Selecting high-profit making companies for benchmarking a low-risk captive unit.
- Not allowing appropriate economic adjustments for differences in the functional profile.
- Committing factual errors in the computation of operating profit margins.
- Relying on information not available to the appellant and not sharing it.
- Using data available at the time of assessment proceedings instead of the latest data.
- Disregarding judicial pronouncements while undertaking the TP adjustment.

The Tribunal found that the companies Cosmic Global Ltd., Eclerx Services Ltd., Genesys International Corpn Ltd., and Coral Hub [Vishal Information Technologies Ltd.] were not comparable to the appellant’s business profile. The Tribunal directed the exclusion of these companies from the final list of comparables. Additionally, the Tribunal excluded Accentia Technologies Ltd. and Infosys BPO based on previous judgments and the presence of extraordinary financial events.

3. Disallowance under Section 14A:

The AO disallowed Rs. 63,207 under section 14A read with Rule 8D, stating that the assessee had not made any suo moto disallowance for earning exempt income. The Tribunal found that the AO did not record any satisfaction as required under section 14A before making the disallowance. The Tribunal relied on the judgment of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. and directed the deletion of the disallowance.

4. Disallowance of Lease Rental Payments under Section 40A(2)(b):

The AO disallowed Rs. 1,168,238 towards lease rental payments, considering them excessive and unreasonable. The Tribunal found that the AO made the disallowance mechanically without properly appreciating the provisions of section 40A(2)(b). The Tribunal relied on the judgment of the Hon’ble High Court of Delhi in the case of Sigma Corporation India Ltd., which emphasized the need for a comparable analysis. The Tribunal directed the deletion of the disallowance.

5. Restriction of Allowance under Section 40(a)(ia):

The AO restricted the allowance to Rs. 1,95,725 under section 40(a)(ia) in subsequent years, out of a total disallowance of Rs. 13,63,963 made in the financial year 2007-08. The Tribunal found that this issue became otiose due to the allowance of the previous grounds.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the deletion of various disallowances and adjustments made by the AO/TPO. The order was pronounced in the open court on 25.09.2018.

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