2012 (4) TMI 622 - AT - Income Tax

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Economic Adjustment Due to Labour Unrest
3. Tax Holiday Benefits u/s 10B
4. Applicability of Proviso to Section 92C(2)
5. Initiation of Penalty Proceedings u/s 271(1)(c)

Summary:

1. Transfer Pricing Adjustment:
The Ld. Assessing Officer (AO) erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study, resulting in a transfer pricing adjustment of Rs. 33,527,903. The AO held that the international transaction of 'Export of carpets' did not satisfy the arm's length principle envisaged under the Income-tax Act, 1961.

2. Economic Adjustment Due to Labour Unrest:
The Ld. DRP/AO erred in not granting an economic adjustment on account of labour unrest while conducting the comparability analysis. The Tribunal noted that the lower operating margin due to labour unrest and under-utilization of capacity should be adjusted. The Tribunal directed the AO to consider external comparables and make necessary economic adjustments to the total cost of the export segment.

3. Tax Holiday Benefits u/s 10B:
The Ld. DRP/AO erred in making a transfer pricing adjustment without appreciating that the appellant is availing tax holiday benefits u/s 10B of the Act. The Tribunal acknowledged that there would not have been any motive for tax advantage by manipulating transfer prices due to the tax holiday benefits.

4. Applicability of Proviso to Section 92C(2):
The Ld. DRP/AO erred in not granting the benefit of +/- 5% range as per the proviso to Section 92C(2) before the amendment. The Tribunal directed the AO to consider the explanatory circular issued by the CBDT and apply the proviso as it stood before the amendment.

5. Initiation of Penalty Proceedings u/s 271(1)(c):
The Ld. AO erred in initiating penalty proceedings u/s 271(1)(c) on the premise that the appellant furnished inaccurate particulars of income. The Tribunal noted that the transfer pricing adjustment made was not in accordance with the law and directed the AO to reconsider the penalty proceedings based on the outcome of the set-aside issues.

Conclusion:
The Tribunal restored the issues to the file of the AO for fresh adjudication in light of the directions provided, particularly considering the Tribunal's decision in the assessee's own case for A.Y. 2006-07. The appeal filed by the assessee was allowed for statistical purposes.