2020 (2) TMI 503 - AT - Income Tax

TP Adjustment - adjustment made to the arm s length price (ALP) of provision of Application engineering Service to the Associated Enterprises (AE) - Comparable selection - HELD THAT - Assessee is into Application Engineering Service thus companies functionally dissimilar with that of assessee need to be deselected. Companies with extraordinary events relating to merger and amalgamation need to be deselected. Arm s length price of payment made to the AEs towards corporate fees - TPO disallowed the payment made towards Intra Group Services (Corporate Fee) primarily on the reason that the assessee failed to furnish required documentary evidences to show that it has received such services from the AEs and further to show that it has been benefited by such services AND in an arm s length scenario no independent party would have made such payment to another party - HELD THAT - In the facts of the present case though the Transfer Pricing Officer has mentioned that CUP is the most appropriate method however it is very much clear that he has neither applied CUP method as per letter and spirit of rule 10B(1)(a) nor has followed any other prescribed method while determining the arm s length price at nil. In our considered opinion the Transfer Pricing Officer is not authorized under the statute to do so. Therefore the adjustment made by the Transfer Pricing Officer with regard to the arm s length price of the Corporate Fee cannot be sustained. Our aforesaid view is well supported by the judicial precedents cited by the learned Authorised Representative. As regards the contention of the learned Departmental Representative for restoring the issue to the Assessing Officer we are of the view that there is no necessity to do so in the facts of the present case as all the required evidences relating to the issue are already on record and have been considered by the Transfer Pricing Officer and learned DRP. In fact after perusing the evidences available on record learned DRP has recorded a categorical finding that receipt of service is ascertainable. Learned DRP has upheld the action of the Transfer Pricing Officer by merely observing that the benefits received by the assessee is not proved and further the assessee has not proved that such services were really required by the assessee. In our considered opinion the aforesaid decision of the Revenue authorities cannot be upheld in view of the ratio laid in the judicial precedents cited before us. Accordingly we delete the addition made on account of adjustment made to the arm s length price of Corporate Fee. Grounds are allowed. Levy of interest under section 234B and 234C which is consequential in nature hence no adjudication is required.

Summary

Issues Involved:
1. Addition made on account of adjustment to the arm's length price (ALP) of provision of Application Engineering Service to Associated Enterprises (AE).
2. Addition made to the arm's length price of payment made to the AEs towards corporate fees.
3. Levy of interest under section 234B and 234C.
4. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Addition on Account of Adjustment to ALP of Application Engineering Service:
The assessee, a resident company and part of the Rolls Royce Group, provided Application Engineering Services to its overseas AEs. The Transfer Pricing Officer (TPO) accepted the four comparables selected by the assessee but added five additional comparables, resulting in an upward adjustment of Rs. 88,29,213 to the ALP. The Dispute Resolution Panel (DRP) partially reduced this adjustment to Rs. 81,03,664.

The assessee contested the inclusion of four out of the five additional comparables:
- Holtec Consulting Pvt. Ltd.: The Tribunal excluded this company as a comparable, noting it was not functionally similar and had been excluded in the assessee's previous assessment year.
- Tata Consulting Engineers Ltd.: Excluded because the company provides comprehensive services from concept to commissioning, unlike the assessee, which provides specific design and support services.
- Kitco Ltd.: Excluded as it is a Government company with a different business model, and the Tribunal followed precedents that Government companies cannot be compared with private sector companies.
- Acropetal Technologies Ltd.: Excluded due to extraordinary events like merger and amalgamation affecting its profitability, and significant fluctuations in its margins.

The Tribunal directed the exclusion of these four companies and retained the rest of the comparables.

2. Addition to ALP of Payment Made to AEs Towards Corporate Fees:
The TPO disallowed the payment of Rs. 5.38 crore towards Intra Group Services, determining the ALP at nil due to insufficient evidence of services received and benefits derived. The DRP upheld this but reduced the adjustment to Rs. 2,28,59,453 after considering the cost-plus arrangement with AEs.

The Tribunal noted that the TPO did not follow any prescribed method, particularly the Comparable Uncontrolled Price (CUP) method, and determined the ALP on an ad-hoc basis. The Tribunal emphasized that the TPO must apply one of the prescribed methods under section 92C and rule 10B. The Tribunal found that the DRP had acknowledged the receipt of services, and thus, the adjustment made by the TPO was unsustainable. Consequently, the Tribunal deleted the addition.

3. Levy of Interest Under Section 234B and 234C:
The issues related to the levy of interest under sections 234B and 234C were deemed consequential, and no specific adjudication was required.

4. Initiation of Penalty Proceedings Under Section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was considered premature and did not require adjudication at this stage.

Conclusion:
The assessee's appeal was partly allowed. The Tribunal directed the exclusion of certain comparables and deleted the addition made on account of the adjustment to the arm's length price of corporate fees. The issues related to interest and penalty proceedings were either consequential or premature.