S. 144C(8): DRP entitled to enhance by questioning very existence of transaction

Hamon Shriram Cottrell Pvt. Ltd vs. ITO (ITAT Mumbai)

The assessee entered into international transactions with its AE by way of payment of management fees, reimbursement of tender cost and payment of R&D expenses and claimed that the transactions were at ALP. The TPO & AO did not dispute that the transactions had been entered into for business purposes and determined the ALP by making adjustments. The assessee filed objections before the DRP. The DRP held that the assessee had to first show that the services had been rendered by the AE and that some tangible and direct benefit was derived by the assessee as a result of such payment and called upon the assessee to produce proof. As the assessee failed to do so, the DRP held that no tangible and direct benefit was derived by the assessee and directed that a much larger adjustment by way of disallowance of the entire amount be made. The assessee appealed to the Tribunal and claimed that the DRP could not have enhanced the assessment. HELD by the Tribunal:

S. 144C(8) empowers the DRP not only to confirm or reduce the variation proposed in the draft order to the benefit of the assessee but also to enhance it to the prejudice of the assessee. This power of enhancement which is impliedly embedded in the matter of issuing directions, due to the use of expression `as it thinks fit’ in s. 144C(5) is expressly set out in s. 144C(8). If the DRP reaches the conclusion that the TPO erred in determining the ALP correctly, warranting further adjustment, the assessee, objecting to the variation in the income due to the order of the TPO, may land in difficulty, and end up with the enhancement of variation. But, for the DRP to exercise its power there has to be some variation proposed in the draft order. The Explanation to s. 144C(8) inserted by the Finance Act, 2012 with retrospective effect from 01.04.2009 has widened the DRP’s power of enhancement to all the matters arising out of the assessment proceedings irrespective of whether they were raised or not by the assessee. With this amplification of the power, even the matters not agitated by the assessee before the DRP can also be considered for the purposes of enhancement. Accordingly, in principle, the DRP was entitled to embark upon the question of enhancement of the TP adjustments. However, on facts as the DRP did not give reasonable opportunity to the assessee, the matter has to be remanded to it for fresh consideration.