9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2011 (12) TMI 393 - AT - Income TaxTransfer pricing adjustments - Reference to TPO - whether the TPO was justified in proceeding with the exercise of determining the ALP distinctly in respect of trading and indenting activities? - held that - trading and indenting activities are quite distinct from each other and hence, benchmarking is also required to be done separately. - the TPO was justified in venturing to determine the ALP in respect of both these activities distinctly. Bifurcation of employee cost between trading and indenting segments. - held that - TPO has rightly worked out the assessee s profit rate from the international transactions in the indenting segment at 0.04% of the turnover. If we consider the ratio of gross commission to the indenting turnover, the same comes to around 1.5%. Regarding comparability - held that - the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPO s request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases - the TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessee s international transactions. - the TPO was justified in considering these three cases as comparable for benchmarking the profits from the assessee s indenting activity. TDS - disallowance u/s 40(a)(ia) - The contention that there was no profit element in such reimbursement of expenses was also raised before the AO, which remained uncontroverted - Once the element of income is missing, naturally, there cannot be any question of deducting tax at source from such payment made, which pre-supposes the taxability of such sum in the hands of paye. Adjustment in the value of the opening stock to the assessee u/s 145A - held that - The right course is to allow the benefit of increase in the value of opening stock of the current year only when the issue of addition to the value of the closing stock of last year attains finality and that too, to the extent the addition is upheld. - AO directed to give consequential relief.
Issues Involved:
1. Confirmation of addition towards transfer pricing adjustment. 2. Disallowance under section 14A. 3. Disallowance under section 40(a)(ia). 4. Adjustment to the value of the opening stock. 5. Levy of interest under sections 234B and 234D. Issue-wise Detailed Analysis: 1. Confirmation of Addition towards Transfer Pricing Adjustment The primary issue revolves around the addition of Rs. 25,56,99,421/- towards transfer pricing adjustment. The assessee entered into international transactions with its Associated Enterprises (AEs), and the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO made an upward adjustment to the Arm's Length Price (ALP) of Rs. 25.56 crores, which was confirmed by the Dispute Resolution Panel (DRP) and subsequently added by the AO. The TPO noted that the assessee's activities were classified into manufacturing and trading. For trading, the TPO required segmental accounts for trading and indenting activities, which the assessee provided after multiple revisions. The TPO found the final results unreliable and revised the segmental accounts, allocating employee costs and rent based on turnover ratios. The TPO determined the Operating Profit to Sales ratio at 9.63% for trading and 0.04% for indenting, accepting the trading ratio but not the indenting ratio. The TPO used comparable cases to determine a reasonable commission rate of 5% for indenting, leading to the proposed adjustment. The Tribunal upheld the TPO's approach, stating that trading and indenting activities are distinct and should be benchmarked separately. The Tribunal also agreed with the TPO's allocation of employee costs and rent based on turnover ratios and the use of comparable cases to determine the ALP. 2. Disallowance under Section 14A The AO disallowed Rs. 66,91,085/- under section 14A, applying Rule 8D, as the assessee earned dividend income of Rs. 86,45,948/- claimed as exempt. The Tribunal referred to the jurisdictional High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which mandates disallowance under section 14A but requires computation on a 'reasonable basis' rather than applying Rule 8D retrospectively. The Tribunal directed the AO to recompute the disallowance accordingly. 3. Disallowance under Section 40(a)(ia) The AO disallowed Rs. 2.96 crores under section 40(a)(ia) for non-deduction of tax at source on "Cost sharing expenses" paid to Bayer Corp Science Ltd. (BCS). The assessee argued that these were reimbursements without any profit element. The Tribunal accepted this argument, citing precedents that reimbursement of expenses without profit element does not attract tax deduction at source. The Tribunal ordered the deletion of this addition. 4. Adjustment to the Value of the Opening Stock The assessee sought an adjustment to the opening stock value by Rs. 33,23,889/-, corresponding to an addition made in the previous year's closing stock. The Tribunal agreed that such an adjustment is warranted once the previous year's addition attains finality. The Tribunal directed the AO to allow the adjustment when the matter is finally decided for the preceding year. 5. Levy of Interest under Sections 234B and 234D The AO levied interest under sections 234B and 234D, which the assessee contested, arguing that the transfer pricing adjustment could not have been anticipated. The Tribunal rejected this argument, stating that interest under section 234B is compensatory and mandatory, irrespective of the foreseeability of the additions. The Tribunal upheld the AO's decision to levy interest. Conclusion The appeal was partly allowed, with the Tribunal upholding the transfer pricing adjustment, directing a recomputation of disallowance under section 14A, deleting the disallowance under section 40(a)(ia), and allowing the adjustment to the opening stock value subject to finality of the previous year's addition. The levy of interest under sections 234B and 234D was also upheld.
|
