2017 (5) TMI 1795 - AT - Income Tax

Tribunal allows appeal, emphasizes need for substantial evidence. Remanded for further action.

The Tribunal allowed the appellant's appeal for statistical purposes, setting aside the Assessing Officer's order to the extent it followed the Dispute ... TP Adjustment - Selection of MAM - DRP adopting of internal TNMM - HELD THAT:- We are unable to persuade ourselves to subscribe to the view arrived at by the DRP in respect of the authenticity of the segmental reporting, veracity of the bifurcation of the expenses pertaining to marketing efforts and various risks associated with the sales pertaining to the Non-AE transactions, which as alleged by the DRP had been bifurcated to the AE segment and not shown on actual basis, as well as the misconceived observation that the assessee had resorted to a comparison between the Non-AE segment local sales of India, as against the AE segment, which we find is absolutely incorrect. We are afraid that a claim of an assessee cannot be dislodged merely on the basis of allegations and surmises, but can only be so done on the basis of substantial material which could go to irrebutably disprove and consequently dislodge the claim of the assessee, with a clear observation as to what fairly could be held to be the correct state of affairs. We thus not being persuaded to subscribe to the observations of the lower authorities, therein set aside the order of the AO passed u/s 143(3) r.w.s 144C(13), to the extent the latter had given effect to the order of the DRP and therein set aside the rejection of the internal TNMM as the most appropriate method adopted by the assessee for benchmarking the international transactions of the assessee with its AE’s, and restore the matter to the file of the AO to give consequential effect to the same. Issues Involved:1. Validity of the order passed by the Assessing Officer (AO) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961.2. Assessment of loss declared by the appellant.3. Addition of Rs. 1,27,40,219/- as difference in arm's length price (ALP) determined by the Transfer Pricing Officer (TPO).4. Rejection of the economic analysis undertaken by the assessee for determining the ALP of international transactions.5. Rejection of segmental profit and loss for AE and Non-AE segments.6. Rejection of internal Transactional Net Margin Method (TNMM) as the most appropriate method.7. Choice of comparables by the AO/TPO.8. Addition of Rs. 14,45,925/- for default in crediting payments relating to employees' contribution to PF, ESIC, and labor welfare fund.Issue-wise Detailed Analysis:1. Validity of the Order Passed by the AO:The appellant challenged the validity of the AO's order under section 143(3) read with section 144C(13) of the Act, claiming it was bad in law and on facts. The Tribunal examined the procedural and substantive aspects of the AO's order.2. Assessment of Loss Declared by the Appellant:The AO assessed the loss at Rs. 1,09,38,700/- against the declared loss of Rs. 2,51,24,840/-. The Tribunal scrutinized the AO's rationale and adjustments leading to this discrepancy.3. Addition of Rs. 1,27,40,219/- as Difference in ALP:The TPO, based on external TNMM, identified 25 comparables and concluded that the appellant's PLI was lower than the arithmetic mean of the comparables. Consequently, an upward adjustment of Rs. 1,27,40,219/- was proposed. The Tribunal evaluated the methodology and comparables used by the TPO.4. Rejection of Economic Analysis for Determining ALP:The AO/TPO rejected the appellant's economic analysis and internal TNMM, arguing that the allocation of costs between AE and Non-AE segments was improper. The Tribunal assessed the validity of this rejection and the appellant's allocation methodology.5. Rejection of Segmental Profit and Loss for AE and Non-AE Segments:The AO/TPO and DRP rejected the segmental profit and loss accounts, claiming artificial allocation of expenses. The Tribunal examined whether the segmental accounts were authentic and accurately reflected the transactions.6. Rejection of Internal TNMM:The AO/TPO rejected the internal TNMM and adopted external TNMM, arguing that the internal method lacked accuracy. The Tribunal analyzed the appropriateness of the internal TNMM and the reasons for its rejection.7. Choice of Comparables:The DRP directed the exclusion of four comparables due to high related party transactions and functional differences. The Tribunal reviewed the selection and rejection of comparables by the AO/TPO and DRP.8. Addition for Default in Crediting Payments:The AO added Rs. 14,45,925/- for the appellant's failure to credit payments relating to employees' contributions to PF, ESIC, and labor welfare fund on time. The Tribunal considered the legal provisions and the appellant's compliance with these requirements.Conclusion:The Tribunal found that the lower authorities failed to provide concrete evidence to substantiate their rejection of the appellant's segmental accounts and internal TNMM. The Tribunal set aside the AO's order to the extent it gave effect to the DRP's directions, restored the matter to the AO for consequential effect, and allowed the appeal for statistical purposes. The Tribunal emphasized the need for substantial material to disprove the appellant's claims rather than relying on hollow and unsubstantiated allegations.Order Pronounced:The appeal of the assessee was allowed for statistical purposes, and the order was pronounced in the open court on 03/05/2017.