2012 (6) TMI 703 - AT - Income Tax

Transfer pricing - Computation of arm s length price - related party transactions Assessing Officer made reference to TPO to ascertain arm s length price - TPO selected four comparables and since arithmetic mean of operating profit margins of said comparables was higher than margin of assessee, he proposed an adjustment of Rs. 8.56 crores Held that - On instant appeal, it was seen that assessee was entitled to benefit of standard deduction of 5 per cent in matter of making transfer pricing adjustment - Further, proposition put forth by assessee that adjustment for ALP was to be made only in respect of transactions with associated enterprises instead of its entire turnover of trading segment was also found acceptable - on facts, impugned order passed under section 143(3), read with section 144C(13), was to be set aside and, matter was to be restored to file of Assessing Officer for disposal afresh Matter remanded.

Summary

Issues:
Transfer pricing adjustment based on allocation of expenses, selection of comparables, benefit of standard deduction, accuracy of operating profit to sales margin calculation.

Transfer Pricing Adjustment based on Allocation of Expenses:
The appeal was against an addition made to the total income of the assessee through transfer pricing adjustment. The TPO found the allocation of expenses by the assessee to be unacceptable, specifically related to advertisement and sales promotion expenses. The TPO believed that expenses should have been allocated between manufacturing and trading segments based on turnover. The TPO selected comparables and proposed an adjustment of Rs. 8,56,37,000 based on operating profit margins. The AO finalized the assessment, making the mentioned addition. The DRP upheld the TPO's decisions, leading to the appeal before the Tribunal.

Selection of Comparables:
The counsel for the assessee challenged the selection of comparables, particularly Indokem Ltd., due to substantial related transactions. The Tribunal agreed that a party with significant related party transactions should be excluded as a comparable. The matter was suggested to be sent back to the AO for further verification. The accuracy of the operating profit to sales margin calculation for selected comparables was also questioned, leading to the decision to verify the calculations at the AO/TPO level.

Benefit of Standard Deduction:
The Tribunal held that the assessee was entitled to the benefit of a standard deduction of 5% in transfer pricing adjustments. It was also decided that adjustments for arms length price should only apply to transactions with associated enterprises, not the entire trading turnover.

Accuracy of Operating Profit to Sales Margin Calculation:
The accuracy of the operating profit to sales margin calculation for specific comparables was questioned. The Tribunal agreed that there were mistakes in the calculations and suggested further verification at the AO/TPO level.

Conclusion:
The Tribunal set aside the previous order and returned the matter to the AO for a fresh decision on transfer pricing adjustment, considering the propositions raised by the assessee and the Tribunal's decisions. The AO was instructed to verify the relevant issues and provide the assessee with a fair opportunity to be heard. As a result, the appeal of the assessee was treated as allowed.