2012 (9) TMI 583 - AT - Income Tax

Transfer Pricing Addition on account of computation of Arm s length price - Assessee had imported raw materials, exported finished goods to associate enterprises - The most appropriate method adopted in the Transfer Pricing Report was Transaction Net Margin Method - Identify 5 comparable companies that engaged in same type of business TPO rejects 4 comparable companies Held that - After analysis all the comparable companies by ITAT direct that TPO has to work out the arithmetic mean of these four companies for determining the arms length price of the assessee company for the international transactions. Therefore case remand back to AO.

Issues Involved:
1. Deletion of addition made on account of computation of arms' length price (ALP) under Section 92C.
2. Direction to eliminate SH Kelkar & Co. from the list of comparables.
3. Non-confirmation of Transfer Pricing Officer's (TPO) findings.
4. Request to set aside CIT(A)'s order and restore the Assessing Officer's order.

Detailed Analysis:

1. Deletion of Addition Made on Account of Computation of Arms' Length Price (ALP):
The department appealed against the deletion of Rs. 5,13,99,552/- made on account of ALP computation under Section 92C. The assessee, a joint venture company engaged in manufacturing industrial fragrances, flavors, and chemical specialties, had international transactions with associated enterprises (AEs). The TPO adjusted the operating profit by Rs. 5,22,88,125/- based on comparables, leading to the addition by the Assessing Officer.

2. Direction to Eliminate SH Kelkar & Co. from the List of Comparables:
The CIT(A) directed the elimination of SH Kelkar & Co. from the comparables list and accepted the comparables identified by the assessee. The TPO had included SH Kelkar & Co., which the assessee objected to, citing differences in age, formation, basic functions, operations, know-how, technology, marketing, customer base, product segments, and financials.

3. Non-Confirmation of TPO's Findings:
The CIT(A) did not confirm the TPO's findings, which included rejecting four comparables identified by the assessee and including SH Kelkar & Co. The CIT(A) accepted the assessee's comparables, leading to the deletion of the entire addition.

4. Request to Set Aside CIT(A)'s Order and Restore the Assessing Officer's Order:
The department argued that the CIT(A)'s order was perverse and contrary to law, requesting the restoration of the Assessing Officer's order.

Judgment Analysis:

Addition on Account of ALP:
The TPO's adjustment was based on including SH Kelkar & Co. and rejecting four of the assessee's comparables. The CIT(A) accepted the assessee's comparables, leading to the deletion of the addition. The tribunal examined whether the comparables identified by the assessee were appropriate and whether SH Kelkar & Co. should be included.

Comparables Analysis:
- AVT Natural Products Ltd.: Accepted by CIT(A) and upheld by the tribunal as it broadly categorizes into manufacturing flavors similar to the assessee.
- Fem Care Pharma Ltd.: Rejected by TPO and upheld by the tribunal due to significant differences in functions and products.
- Goldfield Fragrances Ltd.: Accepted by both parties and included in the comparables list.
- J.K. Helen Curtis Ltd.: Rejected by TPO and upheld by the tribunal due to differences in products, functions, and business nature.
- Synthite Industrial Chemicals Ltd.: Accepted by CIT(A) and upheld by the tribunal as it manufactures products broadly similar to the assessee.

Inclusion of SH Kelkar & Co.:
The tribunal found that the age and formation of a company cannot be criteria for exclusion. However, adjustments for backward integration, research and development, and cost of raw materials were directed. The TPO was instructed to make these adjustments and include SH Kelkar & Co. in the comparables list.

Final Directions:
The tribunal directed the TPO to work out the arithmetic mean of the final four comparables (AVT Natural Products Ltd., Goldfield Fragrances Ltd., Synthite Industrial Chemicals Ltd., and SH Kelkar & Co.) and restrict adjustments to transactions with AEs only. The benefit of Section 92C(2) should be given if the difference is less than +/- 5%.

Conclusion:
The tribunal partly allowed the department's appeal for statistical purposes, directing the TPO to make suitable adjustments and recompute the ALP based on the final comparables list.

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