2011 (1) TMI 62 - AT - Income Tax

TDS - payment to Indian agents of foreign shipping lines for inland haulage of goods by railways - carriage of goods and passengers by any mode of transport other than by railways in the expression work for the purpose of tax deduction at source, section 194C - payment made for transportation of goods from Tughlakabad to Mumbai port by railways - transportation does not fall within the ambit of work - no obligation on the assessee to deduct tax at source u/s 194C - no disallowance can be made u/s 40(a)(ia) Appeal allowed

Summary

Issues Involved:
1. Transfer Pricing Adjustment of Rs. 2,96,72,372/-
2. Disallowance of Expenditure of Rs. 1,29,23,216/- on Inland Haulage Charges under Section 40(a)(ia)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 2,96,72,372/-:

The assessee appealed against the addition of Rs. 2,96,72,372/- made by the Assessing Officer (AO) on account of transfer pricing adjustment, arguing that the AO erred in rejecting the cost plus method which had been consistently accepted in previous years. The assessee, engaged in manufacturing designer steel furniture, exported most of its goods to its wholly owned subsidiary in the UK. The AO, based on the Transfer Pricing Officer's (TPO) report, proposed the addition to align the price of international transactions with the arm's length price.

The Dispute Resolution Panel (DRP) upheld the AO's decision, citing the lack of a clear methodology from the assessee to justify adjustments. The assessee argued that the cost plus method had been accepted in previous years and by the IRS in the UK. However, the TPO used the Transactional Net Margin Method (TNMM), finding no reliable comparable cases for the cost plus method. The TPO selected two comparable companies, Eurocoustic Products Ltd. and Shakti Met Dor Ltd., with operating profit ratios of 8.33% and 41.54% respectively, averaging 24.93%.

The assessee contended that the selected comparables were not appropriate due to differences in products and exceptional growth. The Tribunal noted the lack of documentation from the assessee to prove arm's length transactions and found the cost plus method inappropriate due to inconsistent profit margins. The Tribunal also found discrepancies in the data for Shakti Met Dor Ltd., leading to the exclusion of this company as a valid comparable. Since no valid comparable case was established, the Tribunal remanded the matter to the AO to obtain data of comparable cases and re-adjudicate the transfer pricing adjustment.

2. Disallowance of Expenditure of Rs. 1,29,23,216/- on Inland Haulage Charges under Section 40(a)(ia):

The AO disallowed Rs. 1,29,23,216/- for inland haulage charges paid to agents of foreign shipping lines, invoking Section 40(a)(ia) read with Section 194C, due to non-deduction of tax at source. The DRP upheld this disallowance. The assessee argued that payments for transportation by railways do not require tax deduction under Section 194C, supported by a Board circular and case law.

The Tribunal agreed with the assessee, referring to Explanation-III to Section 194C, which excludes transportation by railways from the definition of "work" requiring tax deduction. Since the transportation was undisputedly by railways, the Tribunal held that there was no obligation to deduct tax at source, thus disallowance under Section 40(a)(ia) was not applicable.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, remanding the transfer pricing issue to the AO for fresh adjudication and allowing the ground related to disallowance of haulage charges. The order was pronounced in open court on January 7, 2011.