2011 (2) TMI 107 - AT - Income Tax

Arms length price - Dispute Resolution Panel (DRP) - During the year under consideration, it had entered into transactions with its Associated Enterprises as well as non-associated enterprises - The TPO computed the amount to be adjusted to the arm s length price of sales/service at Rs. 10,86,80,340 - The assessee referred to Rule 10B(1)(e) and pointed out that the assessee had computed net profit margin from international transactions separately and, therefore, in view of the above rule, the same should have been considered and entity level analysis should not have been done Power of scope of DRP - A combined reading of section 144C read with Rule 4 of Income-tax (Disputes Resolution Penal) Rules, 2009, clearly show that the DRP had to take into consideration the evidence furnished by the assessee before issuing any directions - This was only a procedural requirement and once the same was complied with, the audited segmental accounts should have been admitted as additional evidence by the DRP in order to impart substantial justice to the assessee Segmental results - sections 92 to 94 - TPO has not at all considered the segmental results and, therefore - matter remanded back to AO - the Assessing Officer will consider the segmental results and determine the arm s length price in accordance with law. Rejection of loss making comparables - The TPO had excluded loss making companies for arriving at arithmetic means of comparable companies. However, DRP has not accepted these findings of TPO and has held that U.B. Engineering Ltd., which was a loss making company required to be included as comparable - AO directed to comply with the directions of DRP. Variation/rejection of 5 per cent from arithmetic mean - this issue is covered by the decision in Sony India (P.) Ltd. s case (2008 -TMI - 65530 - ITAT DELHI-H) wherein it was held that Option is given to the assessee as in some cases, variation not exceeding 5 per cent of arithmetic mean might not suit the assessee and, therefore, assessee in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the assessee to challenge the determined price is concerned. The second limb only allows marginal relief to the assessee at his option to take ALP not exceeding 5 per cent of the arithmetic mean. Therefore, benefit of the second limb of the proviso to section 92C(2) is available to all assessees irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the proviso - Decision in Development Consultants (P.) Ltd. v. Dy. CIT (2008 -TMI - 60032 - ITAT CALCUTTA-A) was also relied upon. Application of Arm s length profit margin based on costs to the entire operating costs - this is an alternative plea raised by the assessee that if the operating profit to operating cost at the entity level are to be applied, then the same should be applied only to the international transactions with A.Es and not to non-associated transactions. - As alread held that segmental accounts are to be considered, therefore, the issue arising out of this ground of appeal is only academic in nature and, hence, dismissed. - Appeal is allowed partly in favor of assessee.

Issues Involved:
1. Rejection of segmental accounts.
2. Use of single-year data.
3. Exclusion of other income from operational income.
4. Rejection of loss-making comparables.
5. Adjustment to the total cost rather than cost attributable to AE.
6. Denial of +/- 5% as per the proviso to section 92C(2).

Detailed Analysis:

1. Rejection of Segmental Accounts:
The assessee provided segmental results for transactions with AEs and non-AEs. The TPO rejected these results due to lack of authentication and their absence from audited financial statements. The assessee later submitted audited segmental results to the DRP, which were also rejected. The Tribunal admitted the audited segmental results and restored the matter to the Assessing Officer for de novo consideration. The Tribunal emphasized that international transactions should be considered at segmental levels, not at the entity level.

2. Use of Single-Year Data:
The TPO used single-year data for the financial year 2005-06 to compute the arm's length price. The DRP upheld this approach, stating it was in conformity with Indian transfer pricing regulations. The Tribunal did not specifically overturn this decision but focused on the need for segmental analysis.

3. Exclusion of Other Income from Operational Income:
The assessee contested the exclusion of other business income from operational revenue. However, during the hearing, the assessee did not press this ground. Consequently, the Tribunal dismissed this ground as not pressed.

4. Rejection of Loss-Making Comparables:
The TPO excluded loss-making companies from the comparables. The DRP disagreed and included U.B. Engineering Ltd., a loss-making company, as a comparable. The Tribunal directed the Assessing Officer to comply with the DRP's direction to include loss-making comparables.

5. Adjustment to the Total Cost Rather Than Cost Attributable to AE:
The DRP confirmed the TPO's adjustment to the total cost rather than the cost attributable to AEs. The Tribunal, however, noted that segmental results should be considered, and adjustments should be made accordingly. This ground was allowed for statistical purposes.

6. Denial of +/- 5% as per the Proviso to Section 92C(2):
The DRP denied the benefit of +/- 5% adjustment, stating it was procedural and clarificatory. The Tribunal, referencing the decision in Sony India (P.) Ltd. v. Dy. CIT, held that the benefit of the second limb of the proviso to section 92C(2) is available to all assessees irrespective of the price of international transactions disclosed by them. The Tribunal allowed this ground, stating that the adjustment should be made at the option of the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal emphasized the need for segmental analysis of international transactions and directed the Assessing Officer to consider audited segmental results. The Tribunal also allowed the benefit of +/- 5% adjustment as per the proviso to section 92C(2). The issues regarding the use of single-year data and exclusion of other income from operational income were not overturned. The Tribunal directed the inclusion of loss-making comparables in the analysis.

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