2011 (4) TMI 124 - AT - Income Tax

Arm s length price - Rectification of mistakes - the financial data of these 3 companies of the current relevant year were not in public domain at the time when the TPO passed the order, is not in dispute - Under Rule 29 of the Income-tax Appellate Tribunal Rules, the Tribunal has the power to allow additional evidence, not only if it requires such evidence to enable it to pronounce judgment but also for any other substantial cause - since the additional evidences so produced by the revenue with regard to the issue relating to PE, the matter was necessary to be restored to the file of the Assessing Officer for deciding the same afresh after examining the additional evidence as well as explanation offered by the assessee while rebutting the same Regarding determination of arm s length price - Since this issue is also closely connected to the main issue regarding determination of arm s length price - Decided in the favour of the assessee by way of remand

Summary

Issues:
1. Addition/adjustment to arm's length price determined by the assessee.
2. Admission of additional evidences for determining arm's length price.
3. Working capital adjustment and risk adjustment criteria.
4. Adjustment for +/- of 5% while determining arm's length price.
5. Exclusion of reimbursement of expenses in computing operating margin.
6. Disallowance of staff and team building expenses.
7. Prior period income disallowance.

Issue 1: Addition/adjustment to arm's length price determined by the assessee.
The case involved an appeal against the addition of Rs. 3,28,65,304 to the arm's length price determined by the assessee. The Transfer Pricing Officer (TPO) excluded 4 comparables out of 12 taken by the assessee, resulting in the adjustment. The TPO suggested the adjustment after rectifying a clerical/arithmetic mistake. The assessee applied for admission of additional evidence, arguing that financial data for 3 comparable companies were now available in the public domain, essential for determining the correct arm's length price. The Tribunal allowed the additional evidence submission, emphasizing the necessity of proper comparables for determining the arm's length price accurately.

Issue 2: Admission of additional evidences for determining arm's length price.
The assessee sought admission of additional evidences, including financial data of 3 comparable companies not available during the assessment proceedings. The Tribunal, under Rule 29 of the Income-tax Appellate Tribunal Rules, allowed the additional evidence submission, considering the importance of these comparables in determining the arm's length price. The Tribunal's decision was supported by a precedent where additional evidence was allowed to ensure a fair decision-making process.

Issue 3: Working capital adjustment and risk adjustment criteria.
The assessee requested consideration of working capital adjustment and risk adjustment criteria while determining the arm's length price. As the main issue of determining the arm's length price was remanded to the Assessing Officer/TPO for fresh adjudication, these issues were also directed to be reconsidered by the authorities after evaluating the assessee's contentions and the case facts.

Issue 4: Adjustment for +/- of 5% while determining arm's length price.
The Tribunal directed the Assessing Officer/TPO to decide on the adjustment for +/- of 5% while determining the arm's length price. This issue was closely linked to the main determination of arm's length price and was therefore remanded for a fresh decision after providing the assessee with an opportunity to be heard.

Issue 5: Exclusion of reimbursement of expenses in computing operating margin.
The assessee argued that reimbursement of expenses should be excluded in computing the operating margin and profit margin, focusing only on service fees received. The Tribunal remanded this issue to the Assessing Officer/TPO for a fresh decision, considering the assessee's contentions and the case facts.

Issue 6: Disallowance of staff and team building expenses.
Grounds relating to the disallowance of staff and team building expenses, along with prior period income, were also remanded back to the Assessing Officer for a fresh decision. Both parties did not present substantive arguments on these issues, understanding that they would be reconsidered by the Assessing Officer in light of the case facts and relevant legal provisions.

In conclusion, the Tribunal allowed the appeal for statistical purposes, remanding all issues related to the determination of arm's length price and other associated expenses back to the Assessing Officer/TPO for fresh adjudication. The Tribunal emphasized the importance of proper comparables and fair consideration of all relevant evidence in determining the arm's length price accurately.