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2011 (8) TMI 1170 - AT - Income TaxDifference with ALP in respect of transactions with AEs - Costing Method adopted by AE's - The assessee-company has many Associated Enterprises (AEs) with whom it has international transactions' - The assessee-company has revenue billings with 2 AEs only upon which TPO has reproduced the working given by the assessee company of the profit margin in the case of transactions with those two AEs in which there is revenue billing and also with non-AEs. HELD THAT - We are of the considered opinion that the majority view adopted by the TPO has to be reversed and the view taken by the single member of the DRP has to be upheld being found by us to be correct as per law. In our opinion, the majority view, that the internal comparables are reliable than external comparables, which gives a more precise computation of ALP is a wrong inference based on misconception of facts because the assessee has considered transactions of only with two AE's as compared with the non-AEs. There is no dispute in connection with the method of determination of AlP in applying TNMM in respect of transactions with AEs because the MAM and TNMM adopted by the assessee have been accepted by the TPO. TPO is not correct in observing that the transactions with AE at 40% and transactions with non-AEs at 2.44% do not reflect the true market conditions. She is not correct in her observation that the costs adopted by the assessee-company in arriving at the net margin of its transactions with its AEs and non-AEs needs to be rejected since the cost work is skewed(doctored). In our opinion, the assesseecompany has given proper explanation for the basis of costing adopted by the AE. There is no material on which the TPO has rested her above observation. We are not in agreement with the ld. CIT/DR when he submits that the assessee-company is not correct in splitting its results to suit its convenience. It is not a case of convenience, the assessee company is undeniably having revenue billing with only two AEs. The decision in the case of PANASONIC INDIA PVT. LTD. VERSUS ITO 2010 (9) TMI 682 - ITAT, DELHI , as suggested by the ld. CIT/DR, would not apply here. The simple reason being that the facts of that case are entirely different and distinguishable. Hence, with the force of the principle laid down in the above decisions regarding the scope and application of TNMM method fully support the assessee s contention. This issue is, therefore, allowed in favour of the assessee and against the Revenue. Interest on Advances made to AE's - The assessee-company had paid some amount to two of its subsidiaries as advance during the financial year but it has not charged any interest from both the transactions. AO invoked the interest. The ld.AR has assailed the jurisdiction of the Assessing Officer to touch this issue of charging interest as it was not a part of DRP s directions.- HELD THAT - We hold that the Assessing Officer has jurisdiction to consider this issue, as per law and as per the majority view (DRP view). These advances have been made on account of commercial expediency only as has been claimed by the assessee-company. The Assessing Officer has not disproved the reasons given in this regard. Therefore, the cumulative effect of these factual matrix is that this interest has been wrongly charged. As a result, we allow this issue in favour of the assessee.
Issues Involved:
1. Difference with Arm's Length Price (ALP) in respect of transactions with Associated Enterprises (AEs). 2. Addition of Rs. 9,44,428 on account of interest on advances to AE (Mascon Global (Europe) Ltd). Issue-wise Detailed Analysis: 1. Difference with ALP in respect of transactions with AEs: The primary issue revolves around the determination of the Arm's Length Price (ALP) for international transactions between the assessee-company and its Associated Enterprises (AEs). The assessee-company, engaged in providing information technology services, had transactions with four AEs, but revenue billings were only with MGL Americas Inc. and Emerging Software Consulting Inc., USA. The Transfer Pricing Officer (TPO) determined that the Operating Profit (OP) to cost ratio of the assessee (13.90%) was lower than that of comparable companies (20.41%), leading to an addition to the income. The assessee contended that the transactions with AEs resulted in a profit margin of more than 40%, thereby being at ALP. The TPO's methodology of comparing the consolidated profitability of the assessee with that of comparable companies was disputed. The assessee argued that the correct approach was to compare the profitability of transactions with AEs separately from non-AEs. The Dispute Resolution Panel (DRP) issued directions based on a majority view, which were contested by the assessee. The Tribunal found that the TPO's approach was flawed and upheld the minority view of the DRP, which accepted the assessee's method of determining profitability for transactions with AEs. The Tribunal noted that the assessee had provided a detailed explanation of its costing method, which was project-based and accounted for Strategic Business Units (SBUs). The Tribunal concluded that the TPO had not provided sufficient reasons to reject the assessee's method and that the internal comparables were reliable. The Tribunal relied on precedents such as UCB India P. Ltd vs. ACIT and Dy CIT vs. Starlite, which supported the assessee's contention that only the profit margin from transactions with AEs should be compared with that of comparable companies. Consequently, the addition to the ALP on account of profit margin was set aside. 2. Addition of Rs. 9,44,428 on account of interest on advances to AE (Mascon Global (Europe) Ltd): The second issue concerned the addition of Rs. 9,44,428 as ALP on account of interest on advances made to the subsidiary Mascon Global (Europe) Ltd. The assessee-company had advanced funds to its subsidiaries without charging interest, arguing that these were long-term funds for acquiring new business and were out of interest-free capital raised through equity. The TPO treated these advances as loans and computed interest at the applicable rate, which was added to the income. The assessee contended that the advances were made for commercial expediency and were not loans. The Tribunal found merit in the assessee's argument, noting that the advances were made for business purposes and the TPO had not disproved the commercial expediency. The Tribunal held that the Assessing Officer had jurisdiction to consider this issue but found that the addition of interest was not justified. The Tribunal ordered the deletion of the addition, ruling in favor of the assessee. Conclusion: The appeal was allowed in favor of the assessee on both issues. The Tribunal set aside the additions made by the Assessing Officer based on the TPO's findings and upheld the minority view of the DRP regarding the determination of ALP. The Tribunal also ruled that the addition of interest on advances to the subsidiary was not warranted. The order was pronounced on 12.08.2011.
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