2012 (8) TMI 522 - AT - Income Tax

Determination of arms length price - assessee had purchased at a higher price from its AE than the cost at which it purchased similar items from non-AEs - assessee contested that there were minimum order quantity restrictions for purchases from non-AEs which were not there for purchases from AEs - Held that - DRP has specifically mentioned that rate of purchase from AEs had crossed the tolerance limit only in 6 items of 35 item code material purchased by the assessee from the same AE - AEs of the assessee was giving the designs, placing orders supplying raw materials substantially and finally purchasing its products, thus if assessee had an intention to price its products and purchases so as to give undue benefits to the AEs outside India then it could have done so in other voluminous transactions it entered with the AEs - Out of Rs. 227.244 crores worth transactions with AEs, TPO found that in all cases other than 6 items coded purchases of materials nothing warranting a revision of ALP was there in such a scenario, it will be difficult to believe that assessee had indulged in a pricing methodology to benefit its AEs with regard to purchase of material falling in six item codes - to take 6 items from a pack of 35 and consider only these six items for making a revision of ALP will not give a fair result at all - TPO and AO stepped into the shoes of the assessee to decide on which of the items, it should pay more and in which items it had paid more, ignoring those items on which it had paid less - since number of items on which revision of ALP has been done is insignificant when compared to the total number of purchases and total volume of international transactions addition on account of revision in ALP was not called for and addition stand deleted - in favour of assessee. Exclusion of telecommunication and foreign currency expenses from export turnover - Held that - As decided in Income-Tax Officer Versus Sak Soft Limited 2009 (3) TMI 243 - ITAT MADRAS-D calculation of deduction u/s 10B calls for excluding from export turnover, freight, telecommunication charges and expenses incurred in foreign exchange - in favour of assessee.

Summary

Issues Involved:
1. Determination of arm's length price (ALP) resulting in adjustments for the assessment years 2006-07 and 2007-08.
2. Exclusion of telecommunication and foreign currency expenses from export turnover for the purpose of claiming deduction under section 10B of the Income Tax Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
- Background: The assessee engaged in the manufacture of lingerie had international transactions with Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) found discrepancies in the prices of certain items purchased from AEs compared to non-AEs, leading to an adjustment of Rs. 60,43,329/- for AY 2006-07 and Rs. 11,03,219/- for AY 2007-08.
- Assessee's Argument: The assessee argued that the higher prices paid to AEs were due to the ability to order smaller quantities without minimum order quantity (MOQ) restrictions, which was not possible with non-AEs. The TPO and DRP ignored the overall fairness in pricing across numerous transactions.
- Tribunal's Findings: The Tribunal found that the TPO and DRP selectively focused on six items out of 35, without considering the overall transactions with AEs. The Tribunal emphasized that a global view should be taken, considering the total volume of transactions. The Tribunal cited the decision in Mainetti India (P.) Ltd., which supported the need for a holistic approach in evaluating international transactions.
- Conclusion: The Tribunal concluded that the addition on account of ALP revision was not justified and deleted the adjustments for both assessment years.

2. Exclusion of Telecommunication and Foreign Currency Expenses from Export Turnover:
- Background: The Assessing Officer excluded telecommunication, freight, and foreign currency expenses from export turnover while computing the deduction under section 10B.
- Assessee's Argument: The assessee contended that if such expenses were excluded from export turnover, they should also be excluded from total turnover.
- Tribunal's Findings: The Tribunal referred to the Special Bench decision in Sak Soft Ltd., which held that expenses excluded from export turnover must also be excluded from total turnover.
- Conclusion: The Tribunal directed the Assessing Officer to rework the deduction under section 10B by excluding the specified expenses from both export and total turnover for both assessment years.

Final Order:
- The appeals of the assessee for both assessment years were allowed to the extent of deleting the ALP adjustments and directing the re-computation of deductions under section 10B by appropriately excluding specified expenses from both export and total turnover.