2012 (10) TMI 364 - AT - Income Tax

Adjustment made by the TOP/AO - computation of Arms Length Price in respect of international transactions entered with Associated Enterprises - CIT(A) deleted the addition for AY 2004-05 - Held that - The assessee has worked out its margin of 8.85 per cent and TPO has worked out the margin at 13.30 per cent, and as is evident from the proviso to Section 92C(2) of the Act that if the variation between the ALP and the actual transaction price does not exceed 5 per cent of the latter , the transaction price is to be accepted and no adjustment is required to be made. Since the difference in the Arm s length margin as determined by the TPO and the actual transaction price does not exceed five per cent, we hold that no adjustment is required to be made as it is within 5 per cent range of ALP - against revenue. CUP method as adopted by the assessee is not justifiable - Deletion of addition by CIT(A) for ALP in AY 2005-06 - Held that - Assessee in its transfer pricing study to TPO stated that it has selected CUP method as the primary method in AL analysis & that assessee charged higher rate from its AEs that what it charged from third party. The department has also not brought any evidence on record to controvert the submissions of assessee that the services rendered to the AEs and third parties are of similar type and operate in the same geographical region - assessee has submitted before the TPO as well as before the authorities below that AEs as well as third party are located in the same region and availing similar services and the department has not brought any evidence on record to controvert the same contention of assessee. Hence, ld D.R. has no merit to find fault with the order of CIT(A) that CUP method as adopted by the assessee is not justifiable. In view of above facts, we hold that ld CIT(A) has rightly held that AO/TPO has not brought out a case for making any adjustment on account of ALP - in favour of assessee. Disallowance of set off the loss from one 10A unit against the taxable profits from the other 10A units and non-10A unit - Held that - As decided in Hindustan Unilever Ltd v. Dy. CIT 2010 (4) TMI 206 - BOMBAY HIGH COURT assessee had all the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income - it is plain and evident that the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance - in favour of assessee.

Issues Involved:

1. Adjustment of Arms Length Price (ALP) for international transactions under section 92CA of the Act for AY 2004-05.
2. Adjustment of ALP for international transactions under section 92CA of the Act for AY 2005-06.
3. Set-off of loss from one 10A unit against the taxable profits from other 10A units and non-10A units.
4. Adjustment of brought forward loss/unabsorbed depreciation from preceding year against the taxable profits of the current year.

Issue-wise Detailed Analysis:

1. Adjustment of ALP for AY 2004-05:

The department disputed the deletion of an addition of Rs. 66,75,078 made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) adjustment under section 92CA regarding the computation of ALP for international transactions with Associated Enterprises (AEs). The TPO rejected some of the comparables provided by the assessee and selected new comparables, arriving at an average margin of 13.3% compared to the assessee's margin of 8.85%, leading to the adjustment. The CIT(A) deleted this adjustment, stating that the assessee had actually used the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) and that the difference between the ALP and the actual transaction price did not exceed 5%, making no adjustment necessary. The Tribunal upheld the CIT(A)'s order, confirming that no adjustment was required as the difference was within the 5% range.

2. Adjustment of ALP for AY 2005-06:

The department disputed the deletion of an addition of Rs. 4,66,29,104 made by the AO/TPO under section 92CA. The TPO rejected the CUP method used by the assessee and instead applied the TNMM, selecting new comparables and arriving at a margin of 28.17% compared to the assessee's loss of 0.19%. The CIT(A) held that the CUP method was appropriate as the services provided to AEs and third parties were similar and in the same geographical region. The Tribunal upheld the CIT(A)'s order, stating that the department did not provide evidence to dispute the comparability of the services and geographical region, thus confirming that the CUP method was justified.

3. Set-off of loss from one 10A unit against profits from other units:

The assessee sought to set off the loss from its Pune unit against the profits of its Mumbai and Bangalore units and other sources of income. The AO disallowed this, treating section 10A as an exemption provision. The CIT(A) upheld the AO's decision. However, the Tribunal referred to the decisions of the Hon'ble Jurisdictional High Court in the cases of Hindustan Unilever Ltd. and Black & Veatch Consulting (P.) Ltd., which treated section 10A as a deduction provision. The Tribunal concluded that the assessee was entitled to set off the loss from the Pune unit against the profits from other units and other sources of income, thus allowing the assessee's appeal on this ground.

4. Adjustment of brought forward loss/unabsorbed depreciation:

There was no specific submission or discussion on this issue in the orders of the AO or CIT(A). Consequently, the Tribunal rejected this ground of appeal taken by the assessee due to the lack of substantive arguments or evidence.

Conclusion:

- The Tribunal rejected the department's appeals for AY 2004-05 and 2005-06, upholding the CIT(A)'s decisions on the ALP adjustments.
- The Tribunal partially allowed the assessee's appeal for AY 2005-06, permitting the set-off of the Pune unit's loss against the profits of other units and other sources of income but rejecting the ground related to the adjustment of brought forward losses/unabsorbed depreciation.

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