2011 (11) TMI 700 - AT - Income Tax

Summary

Issues Involved:
1. Adjustment of Rs. 6,82,45,059 to the income of the assessee on account of determination of the Arm's Length Price (ALP).
2. Conducting a benchmarking analysis and arriving at comparable companies.
3. Application of working capital adjustment on comparable companies.
4. Denial of the benefit of +/-5% as provided in the second proviso to Section 92C(2).
5. Appropriateness of the Comparable Uncontrolled Price (CUP) method versus the Transactional Net Margin Method (TNMM).

Detailed Analysis:

1. Adjustment of Rs. 6,82,45,059 to the Income of the Assessee:
The primary issue revolves around the adjustment of Rs. 6,82,45,059 made by the Transfer Pricing Officer (TPO) to the income of the assessee. The TPO determined that the purchases made by the assessee-company were not at Arm's Length Price (ALP) and proposed a downward adjustment. The Assessing Officer (AO) adopted this adjustment, increasing the total assessed income to Rs. 1,44,050,126.

2. Conducting a Benchmarking Analysis and Arriving at Comparable Companies:
The assessee contended that the TPO's benchmarking analysis was not scientific and that the comparable companies selected did not satisfy the test of comparability as provided in Rule 10C(2)(d). The TPO had selected 13 companies for comparison, which the assessee argued were not truly comparable. The assessee suggested that the companies considered in the previous year should have been used instead.

3. Application of Working Capital Adjustment on Comparable Companies:
The assessee argued that the TPO failed to apply the working capital adjustment on the comparable companies, which would have affected the determination of the ALP. The TPO's order did not consider this adjustment, leading to a contention that the ALP was inaccurately computed.

4. Denial of the Benefit of +/-5% as Provided in the Second Proviso to Section 92C(2):
The assessee claimed that the AO and the Dispute Resolution Panel (DRP) erred in denying the benefit of the +/-5% range provided in the second proviso to Section 92C(2). The assessee argued that if this benefit had been applied, the international transactions would have been within the ALP range, negating the need for adjustments.

5. Appropriateness of the CUP Method Versus the TNMM:
The assessee used the CUP method to determine the ALP, whereas the TPO applied the TNMM. The DRP upheld the TPO's decision, stating that the CUP method was not appropriate due to the lack of comparable uncontrolled transactions. The TPO argued that the shareholding pattern indicated that the transactions were not between unrelated parties, thus invalidating the CUP method. The DRP also noted that the TPO provided clear reasons for rejecting the CUP method and selecting the TNMM, which was deemed more appropriate under the circumstances.

Conclusion:
The Tribunal found that the AO did not provide a speaking order and failed to justify why the CUP method was not appropriate and why the TNMM was preferable. The case was remitted back to the AO/TPO with specific directions to:
1. Explain why the CUP method is not appropriate.
2. Justify the preference for the TNMM over the CUP method.
3. Provide detailed reasons and data for adopting the TNMM and the exact adjustments required.
4. Determine whether the assessee is entitled to the benefit of Section 92C(2).

The appeal of the assessee was allowed for statistical purposes, and the stay petition was deemed infructuous. The AO/TPO was directed to give the assessee an opportunity to present its case.