2011 (5) TMI 107 - AT - Income Tax

Transfer pricing adjustment comparable data Arm s length price TNMM method - main objection raised by the assessee before us is against use of financial information of the comparables at the time of assessment but such information was not available at the time of TP study done by the assessee as well as use of financial data of the comparables for the FY 2005-06 instead of three years taken by the assessee. Held that - The information very much existed, though, the assessee might have no access to the said information at the time of TP study but the information, which was very much related to the comparables for the FY 2005-06 which was asked by the TPO and provided by the assessee. Therefore, considering the said information by the TPO while determining the ALP, does not amount to violation of any provisions of law. - if the information gathered by the TPO is relevant material for the purpose of determining the ALP in relation to the international transaction then we do not find any wrong in using the updated data when the correctness and relevance of the same is not objected. Regarding considering the single year/current year data instead of three years - Held that - When the assessee has not made out a case that taking the data for only current financial year does not present the correct and fair financial result of the comparables then there is no mistake in considering the data for the financial year in which the international transaction has been entered into. Regarding turnover filtering as well as difference in functions and risk profile of comparables the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. Held that - unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself. - when the assessee is having benefit of choice/option as per the said provision as existed at the relevant point of time, no separate adjustment is required on account of risk and functional differences. Regarding applicability of 5% variation from the arithmetic mean of the ALP. Held that - the amendment in the second proviso to section 92C(iii) is not retrospective but is prospective from the day from which the amendment is effected i.e. 1-10-2009 - in the arm s length price, to be determined by the Assessing Officer, an adjustment is contemplated in the proviso, is to be made at the option of the assesse. Regarding levy of interest under section 234B Held that - the provisions of section 234B are mandatory and consequential in nature. Regarding claim of bad debts on account of commission and sundry balances - Held that - whether the assessee charged the excess commission or less is not relevant and material once the income is subjected to the provisions of Chapter X being related to the international transaction. If the claim of the assessee is allowed, it will defeat the very object and purpose of the provisions of Chapter X (section 92). Claim of bad debt or business loss would be against the very purpose and object of the provisions of Chapter X of the Act. Claim of bad debt on account of commission and sundry balances not allowed

Issues Involved
1. Transfer pricing adjustment for international transactions.
2. Use of contemporaneous data and multiple year data.
3. Application of turnover filter for identification of comparable companies.
4. Adjustment for differences in functional and risk profile of comparable companies.
5. Applicability of +/- 5% range.
6. Levy of interest under section 234B.
7. Disallowance of bad debts under section 36(1)(vii).
8. Disallowance of profession tax under section 43B.
9. Disallowance of sundry balance written-off.

Detailed Analysis

1. Transfer Pricing Adjustment for International Transactions
The assessee challenged the transfer pricing adjustment of Rs. 25,427,043 made to its international transactions involving marketing support services. The assessee argued that it was already adequately remunerated for its services, earning more than 50% of the sales revenue generated for its associated enterprise (AE). However, the Tribunal noted that the income from international transactions must be computed with regard to the Arm's Length Price (ALP) and not merely the percentage of AE's revenue. The Tribunal upheld the transfer pricing adjustment, emphasizing that the ALP should be determined based on the net profit margin realized from comparable uncontrolled transactions.

2. Use of Contemporaneous Data and Multiple Year Data
The assessee objected to the use of financial information of comparable companies available at the time of assessment, arguing for the use of multiple-year data to capture market cycles. The Tribunal held that the Transfer Pricing Officer (TPO) is empowered to consider relevant material, including updated data, to determine the ALP. The Tribunal found no violation of law in using updated financial data for the financial year in which the international transaction occurred, rejecting the assessee's objection.

3. Application of Turnover Filter for Identification of Comparable Companies
The assessee argued for the application of a turnover filter to exclude comparable companies with significantly higher or lower turnovers. The Tribunal noted that the comparables were selected by the assessee itself in its Transfer Pricing (TP) study and that the assessee did not exclude them based on turnover at that time. The Tribunal emphasized that unless there is a demonstrated impact of turnover differences on the comparables' margins, the general rule does not mandate exclusion based solely on turnover.

4. Adjustment for Differences in Functional and Risk Profile of Comparable Companies
The assessee contended that adjustments should be made for differences in the functional and risk profiles of comparable companies. The Tribunal observed that the assessee had not quantified the adjustments and had raised the issue only after the TPO proposed to use updated data. The Tribunal held that the second proviso to section 92C(2), which allows a margin of +/- 5%, covers such differences, and no separate adjustment is required.

5. Applicability of +/- 5% Range
The assessee claimed the benefit of a +/- 5% range from the arithmetic mean of the ALP. The Tribunal, relying on the decision of the Hon'ble Supreme Court in CIT v. Woodward Governor India (P.) Ltd., held that the amendment to the second proviso to section 92C(2) by the Finance Act, 2009, is prospective and not retrospective. Therefore, the benefit of the +/- 5% range was applicable for the relevant assessment year, and the issue was decided in favor of the assessee.

6. Levy of Interest Under Section 234B
The assessee objected to the levy of interest under section 234B, arguing that it had paid advance tax based on the estimated income in accordance with the law in force at that time. The Tribunal, following the jurisdictional High Court's decision in Prime Securities Ltd. v. CIT, held that interest under section 234B is mandatory and consequential. However, it is not payable if the assessee has paid advance tax in accordance with the law in force at the time of payment.

7. Disallowance of Bad Debts Under Section 36(1)(vii)
The assessee claimed a deduction for bad debts written off, representing commission charged to its AE. The Tribunal held that allowing the claim would defeat the purpose of Chapter X of the Income-tax Act, which governs international transactions. The Tribunal directed the Assessing Officer to verify whether the margins were determined on the basis of ALP after disallowance of bad debts and to make adjustments accordingly.

8. Disallowance of Profession Tax Under Section 43B
The assessee did not press this ground due to the smallness of the amount, and the Tribunal dismissed it as not pressed.

9. Disallowance of Sundry Balance Written-Off
The assessee claimed a deduction for sundry balances written off, arguing that it was an obligation accepted during the financial year. The Tribunal disallowed the claim, noting that it pertained to international transactions already subjected to the provisions of Chapter X of the Income-tax Act. The Tribunal emphasized that subsequent claims of bad debt or business loss would be against the purpose of Chapter X.

Conclusion
The Tribunal partly allowed the appeal of the assessee, granting relief on the applicability of the +/- 5% range but upholding the transfer pricing adjustments and disallowances on other grounds. The Tribunal emphasized the importance of determining ALP based on relevant and updated data, adhering to the provisions of Chapter X of the Income-tax Act.

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