2016 (6) TMI 583 - AT - Income Tax

Tribunal remits transfer pricing issues, upholds exclusion of expenses for deduction under section 10A.

The Tribunal allowed the assessee's appeal for statistical purposes, remitting various transfer pricing issues to the Assessing Officer/Transfer Pricing ... Transfer Pricing - Arm's length price - Transactional Net Margin Method (TNMM) - Cost Plus Method (CPM) - Related Party Transaction (RPT) filter - Working capital adjustment - Tolerance range +/-5% under proviso to section 92C(2) - Section 10A - export turnover and total turnover parity - Foreign tax creditTransfer Pricing - Arm's length price - Transactional Net Margin Method (TNMM) - Cost Plus Method (CPM) - Determination of arm's length price for the assessee's international transactions and validity of methodology adopted by CIT(A) - HELD THAT: - The Tribunal held that the entity level margin adopted by the assessee for benchmarking was not permissible under Chapter X and the Rules when the assessee had both international and third party transactions. While the CIT(A) was justified in rejecting the entity level approach, the CIT(A)'s replacement procedure-choosing the assessee's AEs as tested parties and selecting a domestic company as comparable while excluding certain expenses-was contrary to transfer pricing provisions. Consequently the Tribunal set aside the CIT(A) order on this aspect and remitted the matter to the Assessing Officer/Transfer Pricing Officer to determine ALP afresh in accordance with Chapter X and Rule 10, considering segment wise data and proper comparable selection. [Paras 11]Set aside CIT(A) determination on ALP and remitted to AO/TPO for fresh determination following Chapter X and Rule 10.Related Party Transaction (RPT) filter - Working capital adjustment - Tolerance range +/-5% under proviso to section 92C(2) - Appropriate filters and adjustments to be applied in fresh transfer pricing exercise - HELD THAT: - The Tribunal directed that on remand the TPO apply an RPT filter of 15% (instead of 25%) when selecting comparables, consider working capital adjustments and apply the statutory tolerance range of +/-5% as per the proviso to section 92C(2). The Tribunal emphasised the assessee's obligation to cooperate in furnishing requisite segmental and other details and mandated AO/TPO to give effect to these adjustments during the redetermination. [Paras 11]TPO/AO to apply 15% RPT filter, consider working capital adjustment and +/-5% tolerance range while redetermining ALP; assessee to cooperate.Section 10A - export turnover and total turnover parity - Whether foreign currency expenses (including telecommunication and expenditures for on site development) should be excluded from both export turnover and total turnover for computing deduction under section 10A - HELD THAT: - Following the jurisdictional High Court decision in the assessee's own case for AY 2004 05 and other binding precedents, the Tribunal held that items excluded from the definition of 'export turnover' must also be excluded from 'total turnover' so as to maintain parity between numerator and denominator in section 10A calculations. The Tribunal directed the AO/TPO not to reduce such expenses from export turnover for computation of deduction under section 10A and to exclude them from total turnover as well. [Paras 12]CIT(A)'s direction upheld: exclude specified foreign currency expenses from both export turnover and total turnover for section 10A computation.Foreign tax credit - Consideration of foreign tax credit in consequence of any tax liability determined on remand - HELD THAT: - The Tribunal directed that if, on remand, any additional tax liability is determined by the AO, the AO shall consider and grant appropriate foreign tax credit in respect of taxes paid abroad. The Tribunal did not decide the quantum or admissibility on the merits but left it to the AO to examine and allow credit as per law during consequential proceedings. [Paras 13]AO to consider and grant appropriate foreign tax credit consequent to remand determination, if applicable.Interest under sections 234B and 234D - Penalty under section 271(1)(c) - Consequential treatment of interest and penalty in view of remand - HELD THAT: - The Tribunal observed that the issues relating to interest under sections 234B and 234D are consequential upon any reassessment and were noted as such. The penalty under section 271(1)(c) was held to be premature to adjudicate pending finalisation of income. [Paras 14, 15]Interest issues are consequential; penalty issue is premature and to be considered after final assessment.Final Conclusion: The assessee's appeal is allowed for statistical purposes insofar as transfer pricing and related procedural defects are set aside and remitted to the Assessing Officer/Transfer Pricing Officer for fresh adjudication in accordance with Chapter X and Rule 10, applying a 15% RPT filter, working capital adjustment and +/-5% tolerance; the CIT(A)'s treatment under section 10A is upheld and the AO/TPO directed not to exclude the specified foreign currency expenses from total turnover; AO to consider foreign tax credit and consequential interest/penalty matters after recomputation. Revenue's appeal is dismissed. Issues Involved:1. Reference to Transfer Pricing Officer (TPO) under section 92CA(1)2. Determination of arm's length price (ALP)3. Rejection of Transfer Pricing (TP) analysis4. Adoption of Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM)5. Adjustment for differences between appellant and comparable companies6. Restriction of TP adjustment to Associated Enterprise (AE) transactions7. Benefit of +/- 5% range under section 92C(2)8. Reduction in deduction under section 10A9. Disallowance under section 40(a)(i)10. Foreign tax credit11. Interest under sections 234B and 234D12. Penalty under section 271(1)(c)Detailed Analysis:1. Reference to Transfer Pricing Officer (TPO) under section 92CA(1):The assessee contested the reference made by the Assessing Officer (AO) to the TPO without specifying the relevant clause under section 92C(3). The Tribunal found that the AO's reference was necessary and expedient, and the CIT(A) confirmed the AO's action.2. Determination of arm's length price (ALP):The TPO rejected the assessee's TP study and conducted a fresh analysis, selecting 17 comparables and determining a mean margin of 19.63% (18.87% after working capital adjustment). The Tribunal noted that the CIT(A) adopted a new method without giving a show-cause notice to the assessee and selected a domestic company as a comparable to the AE, which was not permissible. The Tribunal remitted the issue to the AO/TPO for fresh consideration, directing them to use segment-wise data and apply a 15% RPT filter.3. Rejection of Transfer Pricing (TP) analysis:The CIT(A) rejected the TP analysis of both the assessee and the TPO, adopting CPM instead of TNMM and considering the AE as the tested party. The Tribunal found this approach contrary to transfer pricing provisions and remitted the issue for fresh determination.4. Adoption of Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM):The CIT(A) adopted CUP for evaluating the selling commission paid to AE and CPM for onsite services without proper justification. The Tribunal remitted the issue for fresh consideration, emphasizing the need for proper methodology and process.5. Adjustment for differences between appellant and comparable companies:The Tribunal directed the AO/TPO to make proper adjustments for enterprise-level and transactional-level differences and consider the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2).6. Restriction of TP adjustment to Associated Enterprise (AE) transactions:The Tribunal noted that the AO/TPO erred in not restricting the TP adjustment to AE transactions only and directed them to make appropriate adjustments.7. Benefit of +/- 5% range under section 92C(2):The Tribunal directed the AO/TPO to allow the benefit of the +/- 5% range mentioned in the proviso to section 92C(2).8. Reduction in deduction under section 10A:The CIT(A) directed the AO to reduce foreign currency expenses from both export turnover and total turnover while computing the deduction under section 10A. The Tribunal upheld this, following the jurisdictional High Court's decision in the assessee's own case.9. Disallowance under section 40(a)(i):The CIT(A) disallowed the commission payment to MphasiS Corporation under section 40(a)(i) for lack of tax deduction at source. The Tribunal remitted the issue for reconsideration in light of the Circular issued by the Central Board of Direct Taxes.10. Foreign tax credit:The CIT(A) concluded that the assessee failed to substantiate its claim for foreign tax credit. The Tribunal directed the AO to grant appropriate credit for foreign taxes in the outcome of remand proceedings.11. Interest under sections 234B and 234D:The Tribunal noted that interest under sections 234B and 234D is consequential in nature.12. Penalty under section 271(1)(c):The Tribunal found the issue of penalty under section 271(1)(c) premature to deal with and directed the AO to re-compute the penalty based on the enhanced total income.Revenue’s Appeal:The Revenue contested the CIT(A)'s direction to exclude telecommunication and foreign currency expenses from the total turnover for computing deduction under section 10A. The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's ruling in the case of Tata Elxsi Ltd.Conclusion:The assessee's appeal was allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal remitted several issues to the AO/TPO for fresh consideration and directed them to follow proper procedures and make necessary adjustments.