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2011 (2) TMI 99 - AT - Income TaxArms length price - Related parties - comparable transactions - controlled transactions - Held that - burden to establish that international transaction was entered in to at ALP is on the assessee. The assessee is duty bound to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the revenue authorities. In the instant case, the TPO specifically pointed out that assessee did not furnish the relevant FAR analysis prescribed in the aforesaid clauses (e), (f) & (m ) of the Rule 10D(1). Even no such material or FAR analysis finds mention in the impugned orders nor has been placed before us .It is only if the revenue authorities are not satisfied with the ALP or the supporting documents/information furnished by the assessee, this responsibility of determination of ALP is shifted to the revenue authorities, who are to determine the same in accordance with statutory regulations. For these two years, both the assessee as well as the TPO considered CUP method as the most appropriate method for determining ALP of the aforesaid international transactions. The approach of the ld. CIT(A) in the AY 2002-03 and the TPO in the AY 2003-04 in comparing a controlled transaction with another controlled transaction is nowhere prescribed the Act or in Rule 10B(a) of the IT Rules,1962 and is against the spirit of CUP method. - Matter remanded back.
Issues Involved:
1. Determination of Arm's Length Rate of Commission. 2. Comparison of Controlled and Uncontrolled Transactions. 3. Rejection of Write-off Claim. 4. Adjustment of Arm's Length Price by Transfer Pricing Officer (TPO). 5. Burden of Proof and Documentation for Arm's Length Price. 6. Evaluation of Services Rendered by Associated Enterprises (AEs). Issue-wise Detailed Analysis: 1. Determination of Arm's Length Rate of Commission: The primary issue revolves around the determination of the arm's length rate of commission payable to Arvind Worldwide Inc., USA, and Arvind Worldwide Inc., Mauritius. The Commissioner of Income-tax (Appeals) [CIT(A)] determined the arm's length rate of commission at 4.2% instead of 6.2%, computing the arm's length price at Rs. 13,13,532 against Rs. 20,60,842. 2. Comparison of Controlled and Uncontrolled Transactions: The CIT(A) compared the transactions with another Associated Enterprise (AE) instead of comparing international/controlled transactions with uncontrolled transactions. The CIT(A) used the Comparable Uncontrolled Price (CUP) method but failed to appreciate the need for adjustments to account for differences between controlled and uncontrolled transactions. 3. Rejection of Write-off Claim: The CIT(A) rejected the claim of write-off of Rs. 102.25 crores made by the appellant company during the assessment proceedings. The CIT(A) noted that the claim was not made in the computation of income nor was any revised return filed. 4. Adjustment of Arm's Length Price by Transfer Pricing Officer (TPO): The TPO determined the arm's length price of the commission payments at 2.8%, resulting in an addition of Rs. 2,90,64,166 for AY 2002-03 and Rs. 43,07,259 for AY 2003-04. The CIT(A) reduced the addition to Rs. 7,47,310 for AY 2002-03 and deleted the addition for AY 2003-04, citing differences in the services rendered by the AEs and non-related parties. 5. Burden of Proof and Documentation for Arm's Length Price: The burden to establish that the international transaction was entered into at arm's length price (ALP) lies on the assessee. The assessee is required to maintain and furnish documentation as prescribed under Rule 10D of the Income-tax Rules, 1962. The TPO observed that the assessee did not furnish the relevant documentation to justify the higher rate of commission to the AEs. 6. Evaluation of Services Rendered by Associated Enterprises (AEs): The CIT(A) concluded that the AEs rendered much wider and comprehensive services compared to non-related parties. The CIT(A) noted that the agreements with the AEs were entered into much before the Transfer Pricing Regulations came into existence and that the AEs incurred significant expenses for the services rendered. The CIT(A) determined that the commission paid to Arvind Worldwide Inc., USA, should be at the same rate as Arvind Worldwide Inc., Mauritius, i.e., 4.2%. Conclusion and Order: The Tribunal set aside the impugned orders of the CIT(A) for both AY 2002-03 and AY 2003-04 and restored the matter to the CIT(A) for fresh adjudication. The CIT(A) is directed to pass a speaking order, clearly bringing out how the price determined is at arm's length in respect of the transactions entered into by the assessee with its AEs. The CIT(A) should consider the relevant economic and FAR analysis and ensure that the assessee submits the necessary documentation as required under Rule 10D. The Tribunal emphasized that the burden to establish the ALP lies on the assessee and that the CIT(A) should ensure a fair and reasonable determination of the ALP. Outcome: - Appeals of the Revenue are allowed for statistical purposes. - Appeal of the assessee is partly allowed for statistical purposes. - Ground relating to the write-off claim is dismissed as it was not pressed before the Tribunal.
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