2011 (9) TMI 209 - AT - Income Tax

Arm s length price (ALP) - Mandatory issuance of Notice u/s 92C(1) - Order of DRP - Held that - order is not a speaking order - in the interest of justice matter restored to the file of DRP

Issues Involved:
1. Validity of the reference to the Transfer Pricing Officer (TPO) and the determination of Arm's Length Price (ALP).
2. Legality of the draft order of assessment, directions of the Dispute Resolution Panel (DRP), and final assessment order.
3. Acceptance of transaction value as representing ALP.
4. Methodology and correctness of ALP determination.
5. DRP's mechanical upholding of AO/TPO's order.
6. Adjustment of losses in retail business segment.
7. Application of +/- 5% variation under section 92C(2).
8. Consideration of financial results of Associate Enterprises.
9. Depreciation on computers/accessories.
10. Independence and interrelation of grounds of appeal.

Detailed Analysis:

1. Validity of the Reference to TPO and Determination of ALP:
The assessee challenged the reference to the TPO and the determination of ALP, arguing that the mandatory show cause notice under section 92C(3) was not issued for matters decided against them. The TPO made an upward adjustment of Rs. 1,94,06,594/- to the transaction value declared by the assessee, which was contested by the assessee on the grounds of procedural lapses and incorrect application of transfer pricing methods.

2. Legality of the Draft Order of Assessment, Directions of DRP, and Final Assessment Order:
The assessee contended that the draft order of assessment, directions of the DRP, and final assessment order were mechanically made without proper application of mind. The DRP's order was criticized for not being a speaking order and for failing to address the objections raised by the assessee adequately.

3. Acceptance of Transaction Value as Representing ALP:
The TPO/AO/DRP did not accept the transaction value as representing ALP, leading to the addition in the income of the assessee. The assessee argued that the segmented accounting results were ignored on invalid grounds, and the financials were incorrectly adopted at the entity level.

4. Methodology and Correctness of ALP Determination:
Several errors were alleged in the determination of ALP, including:
- Rejection of segmented accounting results.
- Adoption of financials at the entity level.
- Rejection of Resale Price Method (RPM) and adoption of Transactional Net Margin Method (TNMM) as the most appropriate method (MAM).
- Failure to allow comparability adjustments for underutilization of capacity, economic and financial comparability, and other factors.
- Incorrect selection and rejection of comparables.
- Determination of adjustment without restricting it to international transactions with Associated Enterprises (AEs).

5. DRP's Mechanical Upholding of AO/TPO's Order:
The DRP's order was criticized for being mechanical and without proper application of mind. The DRP upheld the AO/TPO's order by merely observing that "allocation keys were not clear," contrary to the material and submissions on record.

6. Adjustment of Losses in Retail Business Segment:
The assessee argued that the AO/TPO/DRP erred in not allowing the adjustment of losses incurred in the retail business segment. It was contended that when profit is estimated by adopting a flat rate, no separate addition for book loss should be made.

7. Application of +/- 5% Variation under Section 92C(2):
The assessee claimed that the benefit of +/- 5% variation under section 92C(2) should have been allowed. The TPO's order, passed before the amendment of the proviso to section 92C(2), should have considered this benefit.

8. Consideration of Financial Results of Associate Enterprises:
The assessee argued that the financial results of Associate Enterprises placed on record were not appreciated, and the determination of ALP based solely on the operating performance of comparable companies identified by the AO was incorrect.

9. Depreciation on Computers/Accessories:
The issue involved the rate of depreciation on computers/accessories. The AO restricted depreciation to 15% treating them as plant and machinery. The assessee contended that peripherals such as printers, scanners, and NT servers form an integral part of the computer and are eligible for depreciation at 60%. This argument was supported by various ITAT decisions, including the Special Bench of Mumbai Tribunal in the case of CIT v. Datacraft India Ltd.

10. Independence and Interrelation of Grounds of Appeal:
The assessee reserved the right to add, alter, and/or amend any ground at the time of hearing, indicating that all grounds and sub-grounds were independent and without prejudice to each other.

Conclusion:
The appeal was allowed for statistical purposes, with the issues being restored to the DRP for reconsideration. The DRP's order was found to be non-speaking, necessitating a detailed re-examination of the assessee's objections and the correctness of the TPO/AO's determinations. The issue of depreciation on computers/accessories was decided in favor of the assessee, allowing depreciation at 60%.

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