2016 (9) TMI 1395 - AT - Income Tax

TPO - selection of comparable - Held that - The issue is restored to the file of the TPO to carry out a FAR analysis of the assessee after characterizing its activity on the basis of evidence on record and then proceed to selecting comparables as per Rules and in accordance with law. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard.

Issues Involved:
1. Incorrect assessment of income under section 144C read with section 143(3) of the Income Tax Act, 1961.
2. Addition on account of difference in the arm's length price (ALP) of international transactions.
3. Disallowance of interest on late deposit of TDS.
4. Levying of interest under sections 234A, 234B, and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Incorrect Assessment of Income:
The assessee challenged the assessment order dated 31/12/2014, which determined an income of Rs. 1,83,22,823 against the returned income of Rs. 1,51,35,030. The primary contention was the erroneous characterization of the business and incorrect selection of comparables in the Transfer Pricing Order (TPO) and Dispute Resolution Panel (DRP) directions.

2. Addition on Account of Difference in ALP:
The TPO made an addition of Rs. 30,43,842 due to differences in the arm's length price for risk consultancy services. The DRP/TPO rejected the Transfer Pricing Documentation, alleging incomplete information for determining the ALP. The TPO characterized the business as 'financial advisory services' and compared it with companies engaged in stock broking and trading of shares.

2.1 Incorrect Rejection of Transfer Pricing Documentation:
The DRP/TPO rejected the internal Transactional Net Margin Method (TNMM) applied by the assessee, citing the unavailability of segmental accounts in the annual report and differences in services provided to associated and non-associated enterprises.

2.2 Wrong Characterization of Business:
The TPO incorrectly characterized the business as 'financial advisory services,' leading to flawed comparable selection. The assessee argued that their business involved crisis and security consultancy, forensic, and risk management services, not financial advisory.

2.3 Incorrect Inclusion/Exclusion of Comparables:
The TPO included companies like Pushpak Financial Services Ltd., Apitco Ltd., HCCA Business Services Ltd., and TSR Darashaw Ltd., which were not functionally comparable. Conversely, suitable comparables like Knight Watch Security Ltd. were excluded due to the unavailability of the annual report.

2.4 Request for Remand:
The assessee sought remand to the TPO for reconsideration of the characterization and selection of comparables. The Tribunal agreed, noting that the TPO's characterization was flawed and required re-evaluation based on the correct understanding of the assessee's business.

3. Disallowance of Interest on Late Deposit of TDS:
The AO disallowed Rs. 1,43,951 as interest on the late deposit of TDS, considering it penal in nature. The assessee argued that the interest was compensatory and should be allowed as a business expense under section 37 of the Income Tax Act. The Tribunal upheld the AO's decision, referencing various judicial precedents that interest on late deposit of TDS is not deductible.

4. Levying of Interest under Sections 234A, 234B, and 234D:
The assessee contested the levy of interest under sections 234A, 234B, and 234D. The Tribunal did not provide a separate detailed analysis for this issue, implying it was not a significant point of contention in the final judgment.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remanding the issue of business characterization and selection of comparables to the TPO for re-evaluation. The disallowance of interest on the late deposit of TDS was upheld, and no specific relief was granted regarding the levy of interest under sections 234A, 234B, and 234D.

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