2023 (8) TMI 715 - AT - Income Tax

Income Tax Tribunal Upholds Transfer Pricing Adjustments but Allows Appeal on Time-Barred Ground

The Deputy Commissioner of Income-tax determined the total taxable income at Rs. 7,04,44,370, deviating from the Appellant's reported amount of Rs. ... Validity of order passed by the TPO u/s 92CA(3) - Computation of period of limitation - HELD THAT:- As it is undisputed fact that transfer pricing officer has passed order u/s 92CA(3) on 30.01.2013 whereas the limitation for passing the said order u/s 92CA(3) expires on 29.01.2013. Therefore, taking into consideration the provision of the Act and decision of PFIZER HEALTHCARE INDIA (P.) LTD [2021 (2) TMI 1152 - MADRAS HIGH COURT] and SAINT GOBAIN INDIA [2022 (4) TMI 808 - MADRAS HIGH COURT] the order u/s 92CA(3) of the Act is time barred by 1 day. Thus the order of the TPO and draft assessment order are barred by limitation, therefore, resulting in assessee not being a eligible assessee u/s 144C(15)(b)(i) of the Act. Consequently, the final assessment was also bad in law. Appeal of the assessee is allowed. Issues Involved:1. Determination of total taxable income.2. Validity of Transfer Pricing Officer (TPO) reference.3. Transfer Pricing adjustments.4. Rejection of benchmarking analysis.5. Methodology for benchmarking international transactions.6. Recharacterization of subsidy income.7. Selection of comparable companies.8. Use of single year data.9. Operating Profit Margin.10. Payments for consultancy services.11. Cost allocations for intra-group services.12. Reimbursement of expenses.13. Recovery of costs with mark-up.14. Effect of subsequent year's miscellaneous income.15. Disallowance of prior period expenses.16. Addition due to mismatch in Annual Information Report (AIR).17. Levy of interest under Sections 234A and 234B.18. Validity of TPO and assessment orders.Summary:1. Determination of Total Taxable Income:The Deputy Commissioner of Income-tax determined the total taxable income at Rs. 7,04,44,370, contrary to the Appellant's reported amount of Rs. 1,14,98,477 under Section 115JB of the Act.2. Validity of TPO Reference:The TPO's reference under Section 92CA(1) was challenged on grounds of not meeting specified conditions, but upheld by the Tribunal.3. Transfer Pricing Adjustments:The TPO made an upward adjustment of Rs. 11,91,65,955 to the Appellant's income, asserting that international transactions with associated enterprises (AEs) were not at arm's length.4. Rejection of Benchmarking Analysis:The TPO rejected the Appellant's benchmarking analysis for consultancy services, which was upheld by the Tribunal.5. Methodology for Benchmarking International Transactions:The TPO's rejection of the Comparable Uncontrolled Price (CUP) method and application of the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking was upheld.6. Recharacterization of Subsidy Income:The Tribunal upheld the TPO's action of aggregating service charge income with consultancy services income for computing the proportion of services rendered to AEs.7. Selection of Comparable Companies:The TPO's selection of functionally different companies as comparables without providing the search process was upheld, despite violating principles of natural justice.8. Use of Single Year Data:The TPO's use of single year data for computing operating margins of comparables was upheld.9. Operating Profit Margin:The Tribunal did not adjudicate on the Appellant's ground regarding additional service charge income not considered in computing transfer pricing adjustment.10. Payments for Consultancy Services:The TPO determined the arm's length price of availing consulting services from AE to be Nil, rejecting the CUP method used by the Appellant.11. Cost Allocations for Intra-group Services:The TPO determined the arm's length price of cost allocation payments to AEs to be Nil, which was upheld by the Tribunal.12. Reimbursement of Expenses:The TPO's determination of the arm's length price of reimbursements to AEs to be Nil was upheld, disregarding the documentation submitted by the Appellant.13. Recovery of Costs with Mark-up:The Tribunal did not appreciate the Appellant's argument that payments made towards services were recovered with a 10% mark-up as per inter-co agreement.14. Effect of Subsequent Year's Miscellaneous Income:The Appellant's ground to regard 'miscellaneous income' of Rs. 2,78,11,245 from AY 2010-11 as operating income for AY 2009-10 was not adjudicated.15. Disallowance of Prior Period Expenses:The Tribunal confirmed the disallowance of Rs. 74,52,345 as prior period expenses.16. Addition due to Mismatch in AIR:The Tribunal confirmed the addition of Rs. 20,77,447 due to unreconciled entries in AIR information.17. Levy of Interest under Sections 234A and 234B:The Tribunal upheld the levy of interest under Sections 234A and 234B of the Act.18. Validity of TPO and Assessment Orders:The Tribunal found that the TPO's order dated 30.01.2013 and the assessment order dated 26.04.2013 were time-barred by one day, rendering the assessment invalid. Consequently, the appeal was allowed on this ground.Conclusion:The appeal was allowed on the ground of time-barred TPO and assessment orders, and other grounds were left open for adjudication if needed.