2012 (11) TMI 717 - AT - Income Tax

Transfer pricing - ALP - selection of comparable - incremental adjustment of Rs. 5.84 crores to the income returned by the assessee as Arm s Length Price (ALP) adjustment. - held that - transfer pricing analysis has been made by the assessee as well as the authorities below only on the basis of internal comparables. At the same time, there is no case that instances of external comparables are unavailable. External comparables are available in the industry carried on by the assessee company. In an environment where sufficient number of external comparables are available, it is imperative to examine those external comparables also alongwith internal comparables so as to come to a balanced finding on the matters relating to deciding of ALP and consequential adjustment called for, if any - matter remanded back.

Summary

Issues:
Transfer Pricing (TP) adjustment, TP analysis based on internal comparables, necessity of analyzing external comparables, legality of TP study approach, redoing TP analysis with external and internal comparables, adjudication of additions under section 14A, disallowance under section 10A, rate of depreciation on UPS, levy of interest under section 234B.

Transfer Pricing (TP) Adjustment:
The case involved a Transfer Pricing (TP) appeal for the assessment year 2007-08, filed by the assessee against the order of the assessing authority under sections 143(3), 92CA, and 144C(5) of the Income-tax Act, 1961. The Transfer Pricing Officer (TPO) had made an incremental adjustment of Rs. 5.84 crores to the income returned by the assessee as Arm's Length Price (ALP) adjustment. The Dispute Resolution Panel (DRP) upheld this revision, resulting in an addition of Rs. 5.84 crores to the income of the assessee-company.

TP Analysis Based on Internal Comparables:
The assessee and lower authorities had conducted TP analysis solely based on internal comparables, overlooking the necessity of analyzing external comparables. It was highlighted that external comparables were available in the industry, and their examination was crucial for a balanced determination of the ALP and any necessary adjustments. The approach of relying only on internal comparables was deemed inappropriate, emphasizing the importance of considering both internal and external comparables for a lawful TP study.

Necessity of Analyzing External Comparables:
The judgment stressed the significance of analyzing external comparables alongside internal ones in TP studies, especially when sufficient external comparables are accessible. Failure to consider external comparables could lead to biased conclusions and distort the acceptability norm. The absence of segmental analysis before relying solely on internal comparables was noted as a flaw, emphasizing the need for an unbiased examination with the inclusion of external comparables.

Legality of TP Study Approach:
The court found the TP study approach in the case to be flawed due to the exclusive reliance on internal comparables without considering external ones. It was emphasized that legal compliance required a comprehensive analysis based on both internal and external comparables to ensure a fair and accurate determination of the ALP and related adjustments.

Redoing TP Analysis with External and Internal Comparables:
Due to the inadequacy of the TP analysis conducted based only on internal comparables, the judgment directed the Transfer Pricing Officer (TPO) to redo the TP analysis considering both external and internal comparables. The TPO was instructed to address all objections raised by the assessee regarding the filtering process, risk factors, and other essential elements affecting the determination of the ALP. The re-exercise allowed for the adoption of the most appropriate method to determine the ALP if required.

Adjudication of Other Grounds:
The judgment also addressed other grounds raised by the assessee, including additions under section 14A, disallowance under section 10A, rate of depreciation on UPS, and levy of interest under section 234B. The assessing authority was directed to reevaluate these aspects considering the latest case laws, with specific instructions for adjudication on each issue. The levy of interest was deemed consequential and did not require further adjudication at that stage.

Conclusion:
The judgment remitted the case back to the TPO and the Assessing Officer for redoing the TP analysis with external and internal comparables. The appeal was treated as partly allowed for statistical purposes, with directions for fresh adjudication on other grounds raised by the assessee under different sections of the Income-tax Act.