2019 (12) TMI 667 - AT - Income Tax

Tribunal directs re-computation of arm's length price, remits liquidated damages issue for fresh consideration

The Tribunal partially allowed the appeal, directing the AO to exclude specific comparables and re-compute the arm's length price. The issues of ... TP Adjustment - selection of comparables - HELD THAT:- Assessee was engaged in the business of distribution and sale of digital switching equipment, cellular exchange equipment, and other telecommunication equipment and provision of related services. It also provided intragroup marketing, technical support and contract software development services. The assessee had entered into various international transactions with its Associated Enterprises thus companies functionally with that of assessee need to be deselected from final list. Deduction on account of liquidated damages - HELD THAT:- As assessee pointed out that it was a contractual obligation, which was not complied with but the Assessing Officer/DRP called it penalty; in fact it was a contractual liability on delay and supply of equipment. It was further pointed out by the Ld.AR that similar issue arose before the Tribunal in the preceding year and the issue has been remitted back to the Tribunal vide para 5 at pages 28 & 29. We find that similar issue has arisen in the preceding years and the matter has been remanded back to the file of Assessing Officer for deciding the issue afresh. Following the same parity of reasoning, we remit this issue back to the file of Assessing Officer to follow the directions of the Tribunal in the preceding year. Claim of expenditure on account of TDS paid during the year - HELD THAT:- In view of the provision of section 40(a)(ia) where the assessee does not deposit the TDS, then such expenditure is not to be allowed as deduction in the hands of the assessee. However, in case the TDS is deposited in the succeeding year, then that expense needs to be allowed as deduction in the year when TDS is deposited. The said facts need to be examined by the AO. Hence, we remit this matter back to the file of Assessing Officer to allow the claim of the assessee after due verification and after allowing reasonable opportunity of hearing to the assessee. Thus, ground raised by the assessee are allowed for statistical purposes. Issues Involved:1. Determination of taxable income.2. Transfer Pricing (TP) issues including jurisdictional error, economic analysis, use of data, application of filters, selection of comparables, and risk adjustment.3. Disallowance of liquidated damages.4. Disallowance of prior period expenditure.5. Levy of interest under Sections 234B and 234C.6. Initiation of penalty proceedings under Section 271(1)(c).Issue-wise Detailed Analysis:1. Determination of Taxable Income:The assessee appealed against the determination of taxable income at Rs. 1,65,94,40,010/- against the returned income of Rs. 1,19,59,22,340/-. The assessee argued that the Assessing Officer (AO) made several additions based on conjectures and surmises, ignoring the factual matrix and nature of transactions.2. Transfer Pricing (TP) Issues:- Jurisdictional Error: The AO referred the matter to the TPO without recording any reasons or having material to reach a prima facie opinion that it was necessary or expedient.- Economic Analysis: The AO/TPO/DRP did not accept the economic analysis undertaken by the assessee and conducted an alternate comparability analysis for determining the ALP of the international transaction related to contract software development (CSD) services.- Use of Data: The TPO/DRP rejected the assessee’s claim to use multiple year data and adhered to single year updated data.- Application of Filters: The TPO/DRP applied inappropriate filters based on different financial year ends, export service income, and employee cost.- Selection of Comparables: The TPO/DRP selected functionally non-comparable companies and rejected comparable companies arbitrarily, including Persistent Systems Ltd., Mindtree Ltd., Acropetal Technologies Ltd., and Infobeans Technologies Ltd.- Risk Adjustment: The TPO/DRP did not allow risk adjustment despite the assessee being a captive service provider remunerated on a cost-plus basis, undertaking no market risk, product/service liability risk, credit risk, or capacity utilization risk.3. Disallowance of Liquidated Damages:The AO disallowed liquidated damages of Rs. 3,38,13,041/- incurred by the assessee pursuant to breach of contractual arrangements, on the grounds that the same could not be verified. The assessee contended that these were contractual obligations and not penalties. The Tribunal remitted the issue back to the AO for fresh consideration, following the precedent set in the preceding year.4. Disallowance of Prior Period Expenditure:The AO disallowed an amount of Rs. 75,41,071/- under Section 37(1) on account of prior period expenditure. The assessee argued that the expenditure was claimed during the year as TDS was deposited during the year. The Tribunal remitted the matter back to the AO to verify and allow the claim accordingly.5. Levy of Interest under Sections 234B and 234C:The assessee contested the levy of interest under Sections 234B and 234C. The Tribunal did not provide a detailed analysis on this issue in the judgment.6. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee argued that the AO initiated penalty proceedings mechanically without recording adequate satisfaction. The Tribunal did not provide a detailed analysis on this issue in the judgment.Conclusion:The Tribunal allowed the appeal partly, directing the AO to exclude certain comparables (Persistent Systems Ltd., Mindtree Ltd., Acropetal Technologies Ltd., and Infobeans Technologies Ltd.) and to re-compute the arm's length price. The issues of liquidated damages and prior period expenditure were remitted back to the AO for fresh consideration. Other grounds, including the levy of interest and initiation of penalty proceedings, were not pressed or detailed in the judgment.