2010 (8) TMI 762 - AT - Income Tax

Summary

Issues involved:
The judgment involves disputes related to the inclusion/exclusion of comparables for computing the arm's length price, allowability of 5% variation to the arm's length price, adjustment on risk factors, addition due to foreign exchange fluctuation, and a legal issue on the Assessing Officer's obligation towards the Transfer Pricing Officer's order.

Inclusion/Exclusion of Comparables:
The appellant, engaged in research and development, used the Transactional Net Margin Method for determining the arm's length price. Disputes arose over the inclusion of certain comparables, particularly Kitco Ltd. and Ujjwal Ltd. The Assessing Officer excluded Kitco Ltd. due to consistent losses, leading to a higher arithmetic mean. The appellant argued for the inclusion of Kitco Ltd. based on the arithmetical mean provision. The CIT(A) agreed to exclude Kitco Ltd. due to risk factors but included Ujjwal Ltd. as a comparable based on the latest data availability.

Allowability of 5% Variation and Risk Adjustment:
The appellant sought a 5% benefit even if the difference from the arm's length price exceeded 5%. The CIT(A) rejected this claim, stating that the risk factors were not quantified and could not be considered at the appellate stage. The CIT(A) held that the TNMM method accommodated general non-quantifiable assumptions, denying the risk adjustments.

Foreign Exchange Fluctuation and Legal Issue:
The Assessing Officer's addition on foreign exchange fluctuation gain was deleted by the CIT(A) as the ECB loan was for acquiring fixed assets. The legal issue of the Assessing Officer's obligation to accept the TPO's order was addressed based on a Tribunal decision, stating the Assessing Officer could determine a different transfer price after hearing the assessee.

Conclusion:
The Tribunal upheld the deletion of the foreign exchange fluctuation gain addition and the inclusion of Ujjwal Ltd. as a comparable. The issues related to the Assessing Officer's obligation to the TPO's order, risk adjustments, 5% adjustment on ALP variation, and Kitco Ltd.'s exclusion were remanded to the Assessing Officer for fresh examination based on relevant Tribunal decisions, allowing the appellant's appeal for statistical purposes.