2011 (6) TMI 130 - AT - Income Tax

Addition - Adjustment in international transaction - the assessee s major sales in international market related to associate enterprise section 93E was applicable and a report in Form 3CEB was duly filed along with the return of income by the assessee - The A.O. invoking the provisions of section 92C(3) of the Act made addition of Rs. 19,72,697 by making upward adjustment in international transaction with the associate enterprise on the ground that similarly placed companies had better margins as compared to the assessee company - While doing so, the A.O. took the net profit of the assessee company at (-) 3.21% instead of 3.26% shown by the assessee, excluding the other income of Rs. 80,28,677 from net profit declared by the assessee - A.O. while holding that similarly placed companies had better margin as compared to assessee company, has not done the same exercise i.e. other income of those companies had not been excluded from their net profit, which according to us, is not proper - Further find that full data of the companies with which assessee s profit margin was compared, was not provided to the assessee company - On the other hand, the data of five companies which were engaged in the similar type of business, provided by the assessee to the A.O., was totally ignored for no cogent reason - therefore, of the considered opinion that the matter requires fresh adjudication by taking the average of net profit shown by the companies considered by the A.O. while making this upward adjustment and the companies on which assessee has placed reliance to show that transaction between the assessee company and its principal was at arm s length price - While doing so, similar figures of all the companies should be taken into consideration. In case, other income of the assessee is excluded form the net profit, the other income of comparable companies should also be excluded from their net profit. With these observations, the matter is restored back to the file of the A.O. for fresh adjudication after giving opportunity of being heard to the assessee.

Summary

Issues:
1. Adjustment in international transaction pricing based on comparison with similarly placed companies.
2. Consideration of other income for calculating margins.
3. Comparability of data provided by Assessing Officer with appellant's company.
4. Application of net margin method for determining arm's length price.
5. Exclusion of other income from net profit for comparability.
6. Ignoring data submitted by appellant for comparison purposes.

Analysis:

1. The appeal was against the CIT(A)'s order confirming the upward adjustment in international transaction pricing for the assessment year 2004-05. The Assessing Officer (A.O.) proposed the adjustment under section 92C(3) due to low operating margin, comparing the appellant's profit with similarly placed companies. The A.O. considered the appellant's transaction with its holding company, where the appellant showed a net profit of 3.26%, which turned negative when other income was excluded. The A.O. relied on data from prowess software for comparability.

2. The appellant argued before CIT(A) that the export incentives, considered as other income, were not factored into margin calculation by the A.O. The appellant contended that the other income should be included for fair comparison with companies where other income was part of net profit. The CIT(A) upheld the adjustment, stating that export incentives should be treated as other income and not part of business profit.

3. The CIT(A) upheld the adjustment, emphasizing the appellant's status as a subsidiary of a foreign enterprise, selling to its parent company. The CIT(A) agreed with the A.O.'s net margin method application due to lack of direct comparables. The CIT(A) found the adjustment reasonable and justifiable, dismissing the appeal against the upward adjustment.

4. The appellant further argued before the tribunal, highlighting the incomparability of selected companies by the A.O. with the appellant. The tribunal noted discrepancies in data provided to the appellant for comparison and directed fresh adjudication by the A.O. The tribunal emphasized the need for a fair comparison, including exclusion of other income for comparability with selected companies.

5. The tribunal allowed the appeal for statistical purposes, remanding the matter to the A.O. for fresh adjudication. The tribunal directed a comprehensive review, considering all relevant factors for determining the arm's length price of international transactions. The tribunal stressed the importance of fair comparability and exclusion of other income for accurate assessment.

This detailed analysis covers the issues raised in the judgment, including the adjustment in pricing, consideration of other income, comparability of data, application of net margin method, and the tribunal's decision to remand the matter for fresh adjudication.