2025 (4) TMI 276 - AT - Income Tax

TP Adjustment - error allegedly committed by the AO in not giving benefit to the assessee out of the revised TP order - HELD THAT - We find that the TPO had passed rectification order rejecting the companies having related party transactions and accordingly revised adjustments. Admittedly the AO has not given effect to the same. Thus we find substance in the contention of the ld. AR and restore the issue to the AO for giving effect to the rectification order passed by the TPO dated 24th February 2023. Accordingly this ground is sustained. Inclusion and exclusion of certain comparable companies - Comparable deselected from final list as functionally dissimilar. Disallowance on account of delayed deposit of Employees contribution for PF/LWF in its computation of income for AY 2015-16 and 2016-17 assessee has already disallowed an amount by reporting in prior period expense and a rectification application also stands filed with AO. Thus these grounds are decided in favour of assessee only for the purpose of verification of the suo motto disallowance.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the Transfer Pricing Officer (TPO) erred in rejecting the economic analysis adopted by the assessee in its Transfer Pricing (TP) documentation, specifically concerning the inclusion and exclusion of comparable companies for benchmarking international transactions.
• Whether the adjustments made by the TPO and subsequently upheld by the Dispute Resolution Panel (DRP) regarding IT enabled support services and marketing support services were justified.
• Whether the disallowance of employee contributions to Provident Fund (PF) and Labour Welfare Fund (LWF) due to delayed deposits was lawful.
• Whether the Assessing Officer (AO) violated procedural provisions under the Income Tax Act, specifically sections 144B and 144C, and principles of natural justice by not providing an opportunity to be heard or issuing a show-cause notice.
• Whether certain procedural errors, such as the timing of the AO's order and the failure to give effect to rectifications, rendered the assessment order invalid.

ISSUE-WISE DETAILED ANALYSIS

1. Transfer Pricing Adjustments

Relevant Legal Framework and Precedents:

The legal framework involves the application of Rule 10B(2) of the Income Tax Rules, 1962, which governs the selection of comparables for determining arm's length prices in international transactions. The Transactional Net Margin Method (TNMM) was applied as the most appropriate method for benchmarking.

Court's Interpretation and Reasoning:

The Tribunal examined the comparability of selected companies based on functional similarity, the presence of extraordinary events, and the reliability of financial data. It emphasized that comparability should be based on functional similarity rather than profitability alone.

Key Evidence and Findings:

The Tribunal scrutinized the functions performed by the companies, their business activities, and the presence of extraordinary events such as mergers and acquisitions. It found that certain companies were either functionally dissimilar or had undergone significant changes affecting their comparability.

Application of Law to Facts:

Based on the functional analysis, the Tribunal excluded certain companies like Wipro Limited and E-Zest Solutions Ltd. due to functional dissimilarity and extraordinary events. It included others like DigiCall Global Ltd. and Crystal Voxx Ltd., which were found to be functionally similar to the assessee.

Treatment of Competing Arguments:

The Tribunal considered arguments from both the assessee and the Revenue, focusing on the functional comparability of the companies and the application of appropriate filters.

Conclusions:

The Tribunal concluded that the arm's length margins of the assessee were acceptable after adjusting the list of comparable companies, thereby partly allowing the appeal on this issue.

2. Disallowance of Employee Contributions to PF and LWF

Relevant Legal Framework and Precedents:

The disallowance was made under section 36(1)(va) of the Income Tax Act, concerning the delayed deposit of employee contributions to PF and LWF. The Tribunal referenced the Supreme Court judgment in Checkmate Services Pvt. Ltd. Versus CIT, which influenced the decision.

Court's Interpretation and Reasoning:

The Tribunal noted that the disallowance was consistent with the Supreme Court's precedent, which upheld the disallowance of delayed deposits beyond the statutory due date.

Key Evidence and Findings:

The Tribunal acknowledged the assessee's submission regarding a suo-moto disallowance of a portion of the delayed contributions and directed verification of this claim.

Application of Law to Facts:

The Tribunal applied the Supreme Court's ruling to uphold the disallowance but allowed verification of the assessee's claim regarding the suo-moto disallowance.

Conclusions:

The Tribunal upheld the disallowance but directed the AO to verify the assessee's claim of a suo-moto disallowance for a portion of the amount.

3. Procedural Violations by the AO

Relevant Legal Framework and Precedents:

The procedural issues involved sections 144B and 144C of the Income Tax Act, which require adherence to principles of natural justice and timelines in assessment proceedings.

Court's Interpretation and Reasoning:

The Tribunal found that the AO failed to give effect to the rectification order passed by the TPO, which constituted a procedural lapse.

Key Evidence and Findings:

The Tribunal noted that the AO did not incorporate revised adjustments as per the TPO's rectification order, which was a valid grievance of the assessee.

Application of Law to Facts:

The Tribunal restored the issue to the AO for proper implementation of the rectification order, acknowledging the procedural oversight.

Conclusions:

The Tribunal directed the AO to effectuate the rectification order, addressing the procedural lapse identified.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include the exclusion and inclusion of specific companies from the list of comparables based on functional analysis, thereby impacting the arm's length pricing determination. It also upheld the disallowance of delayed employee contributions to PF and LWF, in line with Supreme Court precedent.

Core Principles Established:

The Tribunal reinforced the principle that functional comparability, rather than profitability, is paramount in transfer pricing analyses. It also emphasized adherence to procedural requirements under the Income Tax Act, particularly concerning rectification orders and natural justice.

Final Determinations on Each Issue:

• The Tribunal partly allowed the appeal concerning transfer pricing adjustments by modifying the list of comparable companies.
• The disallowance of employee contributions to PF and LWF was upheld, with a directive for verification of the assessee's claim regarding a portion of the disallowance.
• The Tribunal directed the AO to implement the rectification order, addressing procedural violations.