Tribunal sets aside Transfer Pricing adjustment due to Assessing Officer's jurisdictional error.

The Tribunal found that the Assessing Officer exceeded jurisdiction by including new companies in the list of comparables, contrary to the DRP's directions, resulting in a Transfer Pricing adjustment. The Tribunal directed the AO to verify if excluding these companies would eliminate the need for the adjustment. Emphasizing strict compliance with DRP directions, the Tribunal allowed the appeal for statistical purposes, remitting the issue back to the AO for verification. Other grounds raised in the appeal were deemed academic. The appeal was allowed on March 28, 2018.

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Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) in including new comparables.
2. Validity of Transfer Pricing (TP) adjustment made by the AO.
3. Compliance with Dispute Resolution Panel (DRP) directions.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer in Including New Comparables:
The primary issue raised by the assessee was that the AO exceeded his jurisdiction by including four new companies in the final list of comparables, which were not part of the Transfer Pricing Officer's (TPO) final list nor discussed before the DRP. The relevant companies were Tata Elxsi Ltd (Seg.), Cybermate Infotek Ltd., Megri Soft Ltd., and Sankhya Infotech Ltd.

The assessee argued that this inclusion was contrary to the mandate of section 144C(10) & (13) of the Income Tax Act, 1961, which stipulates that the AO must pass the assessment order in conformity with the DRP's directions. The AO cannot go beyond these directions to make additions. The assessee supported this argument by citing the Hon'ble Madras High Court's decision in CIT Vs. Sanmina SCI India Pvt. Ltd., which held that the AO should not venture to raise any issue except those specified in the draft assessment order or raised by the DRP.

The Tribunal agreed with the assessee, noting that the AO had indeed overstepped his jurisdiction by including the four companies, which resulted in a TP adjustment of Rs. 61,80,690/-. The Tribunal emphasized that the AO's actions violated the explicit provisions of section 144C, which requires the AO to conform to the DRP's directions without making any additional adjustments.

2. Validity of Transfer Pricing Adjustment Made by the AO:
The assessee contended that if the four companies added by the AO were excluded, the international transactions with its Associated Enterprises (AEs) would fall within the arm's length range, and no TP adjustment would be required. The Tribunal found merit in this argument and decided to remit the issue back to the AO for verification. The AO was directed to verify whether the exclusion of the four companies would indeed result in the assessee's transactions falling within the arm's length range.

3. Compliance with Dispute Resolution Panel Directions:
The Tribunal underscored that the AO must adhere strictly to the DRP's directions. The DRP had specifically excluded Tata Elxsi Ltd. from the list of comparables, and the other three companies were neither part of the draft assessment order nor the DRP's directions. By including these companies, the AO failed to comply with the DRP's binding directions, as required under section 144C(10) & (13).

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes, remitting the issue back to the AO for verification. The Tribunal also noted that the other grounds raised in the appeal became academic due to the resolution of the primary issue. The AO was instructed to verify the assessee's claim that the exclusion of the four companies would result in the international transactions falling within the arm's length range, thereby nullifying the TP adjustment. The appeal was pronounced allowed for statistical purposes on March 28, 2018.

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