2010 (12) TMI 884 - AT - Income Tax

Stay of demand - Transfer pricing adjustments - The assessee had classified its activities in two categories i.e. manufacturing and trading - The TPO made detailed analysis of trading business and noted that it mainly consisted of the indenting commission business which had turnover of Rs. 734.83 crore whereas the trading sales were only Rs. 42.71 crores - TPO therefore separated the indenting business and noted that the profit margin shown was only 0.04% whereas in respect of trading business margin shown was 9.63% - AO therefore considered indenting business as a separate segment - TPO asked the assessee to file comparable cases which were doing the same business. The assessee failed to do so. Thereupon the TPO himself collected three comparable and computed the transfer pricing adjustments on that basis using CUP method - TNMM method had been rejected and CUP method followed in view of new facts gathered showing that indenting business was a separate segment - Prima facie no case has been made in favour of the assessee on the merit of adjustments - find no case for stay of demand.

Summary

Issues:
Stay application for demand of assessment year 2006-07 due to transfer pricing adjustments.

Analysis:
The stay application was filed by the assessee to halt the demand for the assessment year 2006-07, amounting to Rs. 15,15,35,672, including interest of Rs. 5,26,29,708, primarily due to transfer pricing adjustments. The assessment was finalized based on the direction of the Dispute Resolution Panel (DRP) dated 29-9-2010. The assessee disagreed with the assessing authority's decision and appealed to the tribunal on 18-11-2010.

During the hearing, the counsel for the assessee clarified that no stay petition was filed before the Commissioner of Income Tax (CIT) as the petition filed before the Assessing Officer (AO) was rejected. The assessee directly approached the tribunal, citing that seeking stay before lower authorities was not mandatory, relying on a decision of the Mumbai Bench of the tribunal. The tribunal found the stay petition to be in order based on the precedent cited.

The case involved the classification of activities by the assessee into manufacturing and trading segments, with transfer pricing adjustments mainly related to indenting commission business. The Transfer Pricing Officer (TPO) separated the indenting business from trading, noting significant differences in activities and margins. The TPO applied the Comparable Uncontrolled Price (CUP) method due to the assessee's inability to provide comparable cases, resulting in a transfer pricing adjustment of Rs. 25,56,99,421.

The assessee argued that the TPO's use of the CUP method violated principles of natural justice and consistency, as the TNMM method had been accepted in previous years. The assessee contended that the selected comparables were not suitable, and the assessment was arbitrary compared to previous years. Financially, the assessee highlighted substantial fund requirements and increased loans, seeking a stay of demand until the appeal's disposal.

After reviewing the contentions, the tribunal found no prima facie case in favor of the assessee regarding the transfer pricing adjustments. The financial position of the assessee, with a debt equity ratio of about 1:2 and significant cash reserves, did not indicate financial hardship. Consequently, the tribunal rejected the stay petition but directed the assessee to pay Rs. 1.5 crores by a specified date for an expedited hearing of the case.

In conclusion, the tribunal rejected the assessee's stay petition, emphasizing the lack of a prima facie case in favor of the assessee regarding transfer pricing adjustments and financial hardship. The tribunal directed the assessee to make a payment for an expedited hearing of the case.