2018 (11) TMI 1545 - AT - Income Tax

Appeal partly allowed, remanded for further verification; emphasis on proper justification & evidence in transfer pricing

The appeal was partly allowed for statistical purposes, with several issues remanded back to the Transfer Pricing Officer (TPO) for further verification ... TPA - MAM selection - selection of TNMM as the most appropriate method - Held that:- If adjustments as permissible under TNMM are considered, he ultimately conceded that the issue of selection of most appropriate method may be left open for adjudication in some other year recording the assessee's objections to tinkering with the most appropriate method without any justification. Having thus considered the facts and circumstances alongwith the submissions of the parties, we leave the issue of selection of the most appropriate method open to be considered in another year. We note that the TPO while upsetting the most appropriate method selected by the assessee has admittedly not considered the facts fully and infact appears to have confused himself with the method selected by the assessee. Since in view of the relief maintainable to the assessee even in the method selected by the TPO the issue of most appropriate method in terms of the concession of the assessee becomes academic the same accordingly is left open. Exclusion of comparables - inclusion of Blue Star as a comparable - Held that:- It is seen that the said comparable undertakes research and developmental activities which position is not disputed by the tax authorities. It is also seen that Blue Star has various other segments wherein assembly of air conditioners is also one of the segments. On a consideration of facts we deem it appropriate to remand the issue and direct the TPO to work out the profit margin of the relevant segment of this comparable the inclusion of the said comparable is upheld on the said condition. However in case the TPO is unable to obtain the relevant details then the comparable is directed to be excluded. Capacity utilisation benefit - Held that:- We have seen that the assessee has shown that after reaching a threshold of certain manufacturing activity level the assessee has finally broken even and has also returned profits. The chart and figures made available in the course of the hearing based on documents in public domain admittedly demonstrate the fact. It is well accepted that in the peculiar case like that of the assessee, the manufacturing costs would necessarily have certain fixed overheads and these costs would be met only when manufacturing activity breaches a certain level. Thus considering the peculiar facts and considering the judicial precedent cited we deem it appropriate to restore the issue back to the TPO with the direction to give necessary relief in accordance with law. Addition u/s 41 - Held that:- We find that though the legal position is well settled by the decision of the Delhi High Court in the case of CIT versus EKL [2012 (4) TMI 346 - DELHI HIGH COURT ] however, considering the judicial precedent in assessee’s own case wherein on similar set of facts and circumstances the TPO himself has made no addition in 2014–15 assessment year we accordingly deem it appropriate to set aside the issue to the TPO to verify whether there was any services availed by the assessee during the year or not. The factum of payment made in the year under consideration stands offered in 2015-16 Assessment Year as argued i.e. has it been included in the taxable income of the assessee in terms of section 41 (1) of the Act has no relevance in this case. Subject to verification the TPO is directed to examine the issue afresh and decide the issue in accordance with the law. Issues Involved:1. Adjustment to income under Section 92CA(3) related to the manufacturing segment.2. Methodology for benchmarking international transactions.3. Selection of comparables for Transfer Pricing.4. Denial of economic adjustments under Rule 10B(3).5. Determination of arm's length price for management and business support services.6. Application of the Comparable Uncontrolled Price method.7. Double taxation due to reversal of management and support charges.8. Levy of interest under Sections 234A, 234B, and 234C.9. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Adjustment to Income under Section 92CA(3) Related to the Manufacturing Segment:The assessee challenged the adjustment of INR 155,155,954 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under Section 92CA(3) related to the manufacturing segment. The TPO rejected the Gross Profit-based approach used by the assessee and instead applied the Transactional Net Margin Method (TNMM). The tribunal noted that the TPO did not fully consider the facts and confused the method selected by the assessee. The issue of the selection of the most appropriate method was left open for adjudication in another year.2. Methodology for Benchmarking International Transactions:The TPO rejected the assessee's use of the 'other method' and instead applied TNMM. The tribunal observed that the TPO did not provide valid reasons for this substitution and failed to consider the necessary adjustments under TNMM. The tribunal directed the issue of capacity utilization to be re-examined by the TPO, acknowledging that the assessee was operating below capacity in its first year of manufacturing.3. Selection of Comparables for Transfer Pricing:The assessee contested the inclusion of Blue Star Ltd., Frick India Ltd., and Rexnord Electronics & Controls Ltd. as comparables. The tribunal found that Frick India and Rexnord Electronics were not functionally comparable and excluded them. For Blue Star Ltd., the tribunal directed the TPO to obtain segmental details specific to the air conditioning segment before including it as a comparable.4. Denial of Economic Adjustments under Rule 10B(3):The tribunal noted that the TPO failed to address the economic adjustments sought by the assessee, which were necessary due to the first-year operational losses and underutilization of capacity. The tribunal directed the TPO to grant the necessary relief in accordance with the law.5. Determination of Arm's Length Price for Management and Business Support Services:The TPO determined the arm's length price for management and business support services at 'NIL,' rejecting the assessee's claim of INR 26,911,388. The tribunal found that the TPO did not adequately consider the evidence provided by the assessee, such as manuals and training sessions conducted by the AE. The tribunal remanded the issue back to the TPO for verification of whether the services were actually rendered and the benefits received.6. Application of the Comparable Uncontrolled Price Method:The tribunal noted that the TPO applied the Comparable Uncontrolled Price (CUP) method without sufficient justification. The tribunal emphasized the need for a proper cost-benefit analysis and benchmarking analysis to determine the arm's length price.7. Double Taxation Due to Reversal of Management and Support Charges:The assessee argued that the management and support charges claimed in AY 2013-14 were subsequently reversed in AY 2015-16, leading to double taxation. The tribunal directed the TPO to verify this claim and provide appropriate relief to avoid double taxation.8. Levy of Interest under Sections 234A, 234B, and 234C:The tribunal did not specifically address the issue of interest levied under Sections 234A, 234B, and 234C, as it was consequential to the main issues.9. Initiation of Penalty Proceedings under Section 271(1)(c):The tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) was without merit, as the assessee had neither concealed particulars of income nor furnished inaccurate particulars.Conclusion:The appeal was partly allowed for statistical purposes, with several issues remanded back to the TPO for further verification and consideration. The tribunal emphasized the need for proper justification and evidence in determining the arm's length price and the selection of comparables. The issue of the most appropriate method for benchmarking was left open for future adjudication.