2012 (8) TMI 191 - AT - Income Tax

Transfer pricing rejection of comparable uncontrolled price CUP method and determination on the basis of adjusted ALP - According to assessee it was corporate policy of AEs all over world that after payment of costs, profits were shared equally between AEs that had participated in transaction Held that - in the appellants own case appeal filed by the assessee was allowed and hold that the additions on account adjustment in arm s length price is uncalled for and accordingly the adjustment is rejected Assessee s appeal allowed

Summary

Issues Involved:
1. Rejection of Comparable Uncontrolled Price (CUP) method.
2. Adjustment of the arm's length price to Rs. 110,700,000.
3. Consistency with previous assessment years' decisions.

Detailed Analysis:

1. Rejection of Comparable Uncontrolled Price (CUP) Method:
The appellant, a logistics services provider, employed the CUP method to benchmark its transactions. The Transfer Pricing Officer (TPO) rejected this method, arguing that comparable uncontrolled transactions could not be established due to geographical and economic differences. The TPO emphasized that the agreements were based on profit split rather than a rate, thus disqualifying them as internal CUPs. The TPO also noted that the functional and risk elements varied significantly between the entities in different territories, making the CUP method inappropriate.

2. Adjustment of the Arm's Length Price to Rs. 110,700,000:
The TPO proposed an adjustment of Rs. 110,700,000 to the arm's length price, which was subsequently upheld by the Dispute Resolution Panel (DRP). The DRP approved the adjustment, leading to an addition of Rs. 110,700,000 to the income of the assessee company. The DRP's directions were based on a detailed examination of the assessee's objections and the draft assessment order.

3. Consistency with Previous Assessment Years' Decisions:
The appellant argued that the facts and circumstances of the year under appeal were identical to those of the assessment years 2004-05, 2005-06, and 2006-07. In those years, the Income Tax Appellate Tribunal (ITAT) had accepted the CUP method and rejected the adjustments made by the TPO. The tribunal had restored the matters back to the files of the DRP for the assessment year 2006-07 due to the DRP's laconic order. The appellant's counsel emphasized that the tribunal's decisions for these years should be followed for the current year as well.

Tribunal's Findings:
The tribunal reviewed the lower authorities' orders and the submissions of both parties. It noted that the facts of the current year were identical to those of the previous years. The tribunal referred to its earlier findings, where it had upheld the CUP method and dismissed the adjustments proposed by the TPO. The tribunal observed that the geographical differences were not material for the logistics industry and that the profit split method was typical to the industry.

Conclusion:
The tribunal allowed the appeal filed by the assessee, holding that the adjustment of Rs. 110,700,000 was uncalled for. The tribunal rejected the TPO's and DRP's adjustments, emphasizing that the CUP method was appropriate for the assessee's transactions. The tribunal also dismissed the alternative ground of appeal raised by the appellant, as the main ground had been allowed. The appeal was partly allowed, consistent with the tribunal's decisions for the previous assessment years.