2014 (4) TMI 1096 - AT - Income Tax

Adjustment in the operating margin of CDR unit - addition by the AO which was by taking average operating margin @ 23.72% while the CIT(A) directed the AO to take this margin @ 20.72% and confirmed the addition - Held that - As after excluding the 5 comparables, the cash PLI of 9 companies as computed by the ld. AR and submitted before us, copy of which is given to the ld. DR, comes to 26.78%. In the Assessee s case, the cash operating profit has been computed @ 22.45%. Therefore, the difference comes only 4.33% which is less than 5%. We noted that as per the proviso to Sec. 92C where more than one price is determined by the most appropriate method, the Arm s Length Price has to be taken to be the arithmetic mean of such prices. We also noted that the said proviso during the impugned assessment year also provides that at the option of the Assessee the price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean be taken to be the Arm s Length Price. Since the difference in the case of the Assessee is only 4.33% which is less than 5%, therefore, in our opinion, no addition on this account can be sustained in the case of the Assessee. We, accordingly, set aside the order of CIT(A) and delete the addition sustained by CIT(A) - Decided in favour of assessee. Market cost adjustment of 10.96% to the comparable uncontrolled price - Held that - In our opinion, no interference is called for in the order of CIT(A). CIT(A) has rightly directed the AO to allow the adjustment @ 10.96% for marketing expenses after verifying the correctness of the data submitted by the Assessee for allowing the relief. Similar direction, we noted, has been given by CIT(A) in A.Y 2004-05 and 2005-06 and has been confirmed by this Tribunal. The ld. DR could not bring any cogent material or evidence before us which may compel us to take a different view than what has been taken by the CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Transfer Pricing Adjustment on IT Enabled Engineering Services.
2. Profitability of CDR Unit and Wrong Comparison by TPO.
3. Adjustment in Operating Margin of CDR Unit.
4. Marketing Cost Adjustment.

Detailed Analysis:

1. Transfer Pricing Adjustment on IT Enabled Engineering Services:
The Assessee challenged the CIT(A)'s confirmation of a Rs. 65,01,783/- transfer pricing (TP) adjustment on IT Enabled Engineering Services rendered to its Associated Enterprises (AEs). The Assessee argued that the TPO incorrectly computed the operating margin at 23.72%, which was later adjusted to 20.72% by CIT(A).

2. Profitability of CDR Unit and Wrong Comparison by TPO:
The Assessee contended that the TPO overlooked the profitability of its CDR unit by not considering the notional revenue from services rendered to the Goa plant. The Assessee argued that if the same rate applied to services rendered to the AE abroad was applied to the Goa plant, the operating profit margin would be 14.12% instead of the TPO's computed 8.51%.

3. Adjustment in Operating Margin of CDR Unit:
The Assessee applied the Transactional Net Margin Method (TNMM) and selected six comparable companies with an average operating profit margin of 9.08%. The TPO, however, selected 14 different comparables with an average margin of 23.72%. The Assessee objected to five of these comparables, citing issues such as different business models and super profits. The tribunal agreed with the Assessee's objections and excluded these five companies, leading to a revised average margin of 26.78% for the remaining comparables. The tribunal concluded that the Assessee's operating margin of 22.45% was within the permissible 5% range, thus no addition was justified.

4. Marketing Cost Adjustment:
The Revenue appealed against the CIT(A)'s decision to allow a marketing cost adjustment of 10.96% for the Assessee's export sales. The CIT(A) had based this adjustment on the Assessee's marketing expenses in Dubai, Europe, and India, following a similar principle upheld in previous years. The tribunal upheld CIT(A)'s decision, noting that the Revenue failed to provide compelling evidence to warrant a different view.

Conclusion:
The tribunal allowed the Assessee's appeal, deleting the Rs. 65,01,783/- TP adjustment, and dismissed the Revenue's appeal regarding the marketing cost adjustment. The tribunal's decision was based on a detailed analysis of comparable companies, the application of the TNMM method, and the consistency of marketing cost adjustments with previous years' rulings.