Tribunal directs TP adjustments using TNMM & PLI, reconsider comparables, restrict AEs, reassess Section 36(1)(iii) disallowance.

The Tribunal partly allowed the appeals for AY 2013-14 and AY 2014-15. It directed the AO/TPO to benchmark international transactions using TNMM and PLI of OP/VAE, reconsider inclusion/exclusion of specific comparables, restrict TP adjustment to transactions with AEs, and reassess disallowance under Section 36(1)(iii) based on the appellant's claim regarding interest-free funds.

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Issues Involved:
1. Validity of the assessment order passed under the directions of the Dispute Resolution Panel (DRP).
2. Upward adjustment to the income of the appellant in respect of international transactions of freight receipts and expenses.
3. Rejection of the Operating Profit (OP) to Value Added Expenses (VAE) ratio as the Profit Level Indicator (PLI) by the Transfer Pricing Officer (TPO).
4. Inclusion and exclusion of comparable companies in the comparability analysis.
5. Use of multiple year data for transfer pricing analysis.
6. Restriction of Transfer Pricing (TP) adjustment to the extent of international transactions with Associated Enterprises (AEs).
7. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
8. Disallowance under Section 36(1)(iii) of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant argued that the assessment order passed in pursuance to the directions issued by the DRP was vitiated. The Tribunal did not specifically address this issue separately but proceeded to analyze the substantive grounds of appeal raised by the appellant.

2. Upward Adjustment to Income:
The appellant challenged the upward adjustment of INR 22,61,25,615 for AY 2013-14 and INR 17,78,40,052 for AY 2014-15 made by the AO/DRP concerning international transactions of freight receipts and expenses. The Tribunal examined whether the TPO/DRP were justified in their approach and calculations.

3. Rejection of OP/VAE Ratio as PLI:
The TPO rejected the OP/VAE ratio used by the appellant and substituted it with OP/TC. The Tribunal found that the appellant had rightly adopted the PLI of OP/VAE for benchmarking its international transactions of freight receipts and expenses, as supported by the Tribunal’s earlier decision in the case of DHL Logistics Private Limited. The Tribunal directed the AO/TPO to benchmark the international transactions using TNMM as the most appropriate method and PLI of OP/VAE.

4. Inclusion and Exclusion of Comparable Companies:
The Tribunal noted that the TPO had included certain companies in the final list of comparables, which the appellant contested. The Tribunal found that the inclusion/exclusion of comparables should be reconsidered based on functional similarity. Specifically, the Tribunal directed the AO/TPO to reconsider the inclusion of Shreyas Relay System Ltd and Om Logistics Ltd, as the functional profile of the appellant remained similar to that of DHL Logistics Private Limited, where these companies were excluded.

5. Use of Multiple Year Data:
The DRP upheld the TPO’s rejection of multiple year data used by the appellant, stating that Rule 10B(4) mandates the use of data for the financial year in which the international transaction was entered. The Tribunal did not find any error in the DRP’s decision on this matter.

6. Restriction of TP Adjustment:
The appellant argued that the TP adjustment should be restricted to the extent of international transactions with AEs. The Tribunal agreed with the appellant, citing the Bombay High Court’s decisions in CIT Vs. Firestone International (Pvt.) Ltd., Tara Jewells Exports Pvt. Ltd., and Thyssen Krupp Industries India (P) Ltd. The Tribunal directed the AO/TPO to work out the TP adjustment only in respect of transactions with AEs and to restrict the adjustment within the safe harbor range of +/- 3%.

7. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature.

8. Disallowance under Section 36(1)(iii):
The AO disallowed interest expenditure under Section 36(1)(iii) related to capital advances. The Tribunal found that the AO did not properly consider the appellant’s claim that the advances were made from interest-free funds available at the relevant time. Citing the Supreme Court’s decision in CIT (LTU) Vs. Reliance Industries Ltd., the Tribunal directed the AO to reconsider the issue, allowing the appellant to substantiate its claim that the advances were made from interest-free funds.

Conclusion:
The Tribunal partly allowed the appeals for AY 2013-14 and AY 2014-15. It directed the AO/TPO to:
1. Benchmark international transactions using TNMM and PLI of OP/VAE.
2. Reconsider the inclusion/exclusion of specific comparables.
3. Restrict TP adjustment to transactions with AEs.
4. Reassess the disallowance under Section 36(1)(iii) after considering the appellant’s claim regarding interest-free funds.

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