2017 (9) TMI 99 - AT - Income Tax

Tribunal partly allows appeal on transfer pricing, grants deduction under Section 10A.

The appeal was partly allowed with the Tribunal remitting the issues related to transfer pricing adjustment back to the Assessing Officer (AO)/Transfer ... TPA - comparable selection - admission of additional ground - Held that:- Merely making a reference about their functional dissimilarity without pointing out specific functional dissimilarity in the function of the assessee vis-a-vis comparable prima facie, the assessee cannot be allowed to resile from the comparables selected by it. This shows that the assessee has taken the Government machinery for a ride for 11 years. Therefore the claim of the assessee for admission of additional ground is on weak footing except that the assessment year involved is the assessment year 2006-07 which is very near to the assessment year (AY 2004-05) for which the appeal is decided by the Special Bench in Deputy CIT v. Quark Systems P. Led. (2009 (10) TMI 591 - ITAT, CHANDIGARH ), holding that those were the initial years of transfer pricing assessments. The co-ordinate Bench has not laid down a law that anytime and every time the assessee can resile from a comparable. Therefore, after pointing out the above facts, respectfully following we admit the additional ground of appeal of the assessee in interest of justice. Determination of functional profile of the assessee - high-end service provider or low-end service provider - Held that:- In view of the categorical finding of the co-ordinate Bench for the assessment year 2005- 06 based on the transfer pricing study report of the assessee itself now it is not possible to assume the functional profile of the assessee as low-end ITES provider. It is also not possible to ignore the findings of the co-ordinate Bench for the assessment year 2007-08 further the appeal before us is the assessment year 2006-07 which is in between the year of both the above years decided by the co-ordinate Bench. The two comparables objected by the assessee also cannot be directed for its exclusion without reaching at the correct functional profile of the assessee. Therefore, in the interest of justice and to dig out the correct functional profile of the assessee amidst host of confusion, we set aside the whole issue of transfer pricing adjustment back to the file of the learned Assessing Officer/Transfer Pricing Officer for ascertaining the correct functional profile of the assessee for this year without being influenced by the order of the co-ordinate Bench for the assessment year 2007-08, then carry out examination of comparability analysis and then determine the arm's length price of the international transactions. Needless to say that the assessee shall be duty bound to provide correct functional profile of the assessee and its complete search process and its steppers results to the learned Transfer Pricing Officer/Assessing Officer along with its justification for claim of working capital adjustments or capacity utilisation for examination by the learned Assessing Officer/Transfer Pricing Officer. Whether deduction under section 10A of the Income-tax Act is allowable after setting of brought forward losses of the previous year, or before that? - Held that:- According to us after the decision of the Hon’ble Supreme Court in the case of CIT v. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] issue is squarely covered in favour of the assessee. Issues Involved:1. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).2. Addition to the returned income by re-computing the arm's length price (ALP) of international transactions.3. Errors in determining the ALP of international transactions.4. Denial of the 5% margin benefit under the proviso to Section 92C(2) of the Income-tax Act.5. Limitation of deduction under Section 10A of the Income-tax Act.6. Charging and computing interest under Sections 234B, 234D, and 244A of the Income-tax Act.7. Validity of initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act.Detailed Analysis:1. Jurisdictional Error:The appellant contended that the Assessing Officer (AO) did not record any reasons in the draft assessment order for referring the matter to the TPO for computation of the ALP under Section 92CA(1) of the Income-tax Act. However, no arguments were advanced by the appellant's representative, and thus, this ground was dismissed.2. Addition to Returned Income:The AO made an addition of Rs. 16,24,01,920 to the appellant's income by re-computing the ALP of the international transactions. The appellant contested this addition, arguing that the AO/Transfer Pricing Officer/Dispute Resolution Panel (DRP) erred in determining the ALP. The Tribunal analyzed the comparables selected by the TPO and the appellant's objections to the inclusion and exclusion of certain comparables.3. Errors in Determining ALP:The appellant raised several issues regarding the determination of the ALP:- The TPO rejected two comparables selected by the appellant, citing reasons like persistent losses and negative growth.- The appellant argued for the exclusion of two comparables, Vishal Information Technologies Ltd. and Alpha Geo (India) P. Ltd., on the grounds of functional dissimilarity.- The Tribunal noted that the appellant had not objected to these comparables in earlier proceedings and admitted the additional ground of appeal for their exclusion.- The Tribunal remitted the issue back to the AO/TPO to ascertain the correct functional profile of the appellant and re-examine the comparability analysis.4. Denial of 5% Margin Benefit:The appellant contended that the AO/DRP erred in denying the benefit of the 5% margin allowed under the proviso to Section 92C(2) of the Income-tax Act. This issue was linked to the transfer pricing adjustment and was remitted back to the AO/TPO for reconsideration.5. Limitation of Deduction under Section 10A:The appellant claimed that the deduction under Section 10A should be allowed on the gross total income rather than profit and gains of the eligible undertaking without any set-off of brought forward losses. The Tribunal referred to the decision of the Supreme Court in CIT v. Yokogawa India Ltd. and allowed the appellant's claim, stating that the deduction under Section 10A should be allowed before setting off brought forward losses.6. Charging and Computing Interest:The appellant contested the charging and computation of interest under Sections 234B, 234D, and 244A of the Income-tax Act. No specific arguments were advanced, and the Tribunal noted that the charging of interest is consequential to the computation of total income. Therefore, this ground was dismissed.7. Validity of Penalty Proceedings:The appellant argued against the initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act. The Tribunal found this ground premature as the AO had merely initiated the penalty proceedings, and the appellant would have an opportunity to represent its case. Thus, this ground was dismissed.Conclusion:The appeal was partly allowed with the Tribunal remitting the issues related to transfer pricing adjustment back to the AO/TPO for fresh examination. The Tribunal allowed the appellant's claim regarding the deduction under Section 10A but dismissed the grounds related to jurisdictional error, charging of interest, and initiation of penalty proceedings.