2012 (10) TMI 884 - AT - Income Tax

Transfer pricing ALP computation - TNMM method - selection of comparable - Held that - there is no dispute that the transaction between the Assessee and its group companies in Germany whereby the Assessee provided services in the form of contract testing and research services was an international transaction attracting the provisions of Sec.92 of the Act Comparables chosen by the assessee on the basis of the contemporaneous data for A.Y 2006-07 gives an arithmetic mean of 18.97% which we have already mentioned. This is the highest arithmetic mean of the comparable chosen by the assessee - TPO has not given any reason whatsoever for rejecting these comparables - if TPO does not reject a comparable on the ground of functional incomparability then neither the AO or the revenue can take a plea of functional incomparability of the comparables chosen by the assessee in its TP Study - assessee s operative margin has to be held as within the range of 5% of the arithmetic mean of 18.97% of comparable companies and the same has to be accepted as ALP - addition made by the AO and confirmed by the DRP is directed to be deleted - the reasons given by the TPO does not anywhere mentioned as to how the comparables selected by the assessee were not functionally comparable. - decided in favor of assessee.

Summary

Issues Involved:
1. Assessment of income under normal provisions of the Income Tax Act, 1961.
2. Adjustment to the transfer price of international transactions.
3. Rejection of Transfer Pricing documentation and the selection of comparables.
4. Application of the +/- 5% range benefit under Section 92C(2) of the Act.

Detailed Analysis:

1. Assessment of Income:
The primary issue was whether the Assessing Officer (AO) erred in assessing the income of the appellant at Rs. 17,52,18,050 against the returned income of Rs. 3,80,76,259. This was based on the directions from the Dispute Resolution Panel (DRP) upholding the adjustment to the transfer price proposed by the Transfer Pricing Officer (TPO).

2. Adjustment to Transfer Price:
The AO/TPO proposed an addition of Rs. 13,71,41,793 concerning international transactions related to investment advisory support services, alleging that the transactions were not at arm's length as per Sections 92C(1) and 92C(2) of the Act, read with Rule 1OD of the Income-tax Rules, 1962. The appellant argued that the AO did not accept the arm's length price (ALP) determined by the appellant and instead referred the matter to the TPO without satisfying the conditions laid down under section 92C(3).

3. Rejection of Transfer Pricing Documentation:
The appellant contended that the AO/TPO/DRP erred in rejecting the Transfer Pricing documentation submitted by the appellant, which applied the Transactional Net Margin Method (TNMM). The appellant highlighted that it is a limited risk investment advisory entity and provided detailed documentation of its business model, functional, and risk profile. The TPO, however, conducted a fresh search for comparables and identified a different set of companies, which the appellant argued were not functionally comparable.

4. Application of +/- 5% Range Benefit:
The appellant initially did not press for a standard deduction of (+/-) 5% benefit under the proviso to Section 92C(2) but later argued that the benefit should be extended if the difference between the price adopted by the appellant and the ALP determined by the TPO was within the 5% range.

Tribunal's Findings:

Assessment of Income:
The Tribunal noted that the AO had not provided adequate reasons for rejecting the appellant's comparables and for the significant adjustment to the income. The Tribunal emphasized the need for a detailed functional analysis and comparability study.

Adjustment to Transfer Price:
The Tribunal found that the TPO had not justified the rejection of the appellant's comparables and had not provided reasons for selecting new comparables. The Tribunal also noted the appellant's detailed objections to the TPO's comparables, which were not addressed adequately.

Rejection of Transfer Pricing Documentation:
The Tribunal observed that the TPO's rejection of the appellant's Transfer Pricing study was without proper reasoning. The Tribunal highlighted that the appellant had provided a comprehensive analysis of its functions, assets, and risks, which the TPO did not adequately consider.

Application of +/- 5% Range Benefit:
The Tribunal concluded that the appellant's operating margin was within the 5% range of the highest arithmetic mean of the comparables chosen by the appellant, which was 18.97%. Therefore, the price adopted by the appellant was deemed to be at arm's length.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the addition made by the AO and confirmed by the DRP. The Tribunal emphasized the need for a detailed and reasoned approach in Transfer Pricing assessments and upheld the appellant's methodology and comparables.