2013 (8) TMI 281 - AT - Income Tax

Transfer pricing Adjustment u/s 92CA - TPO made adjustment as per Tribunal's order - Held that - on a careful perusal of the order of the TPO giving effect to the directions contained in the earlier order of this Bench, it is observed that there were variations and total inconsistencies while implementing the directions of the earlier Bench - TPO was in presumption that the earlier Bench had directed to reduce sale return only while calculating CAGR and debtors without appreciating the fact that the earlier Bench had categorically held that those sales did not materialize and, thus, should be reduced from sales - TPO has arrived at the operating costs for the previous years following a new method, a clear deviation from the original order passed on 30.10.2009 and has adopted a totally a different method of calculation of cost by deducting the marketing expenses from the total cost as the marketing division was transferred to TIPL and it does not exist on the date of valuation - TPO adopted corrected method in estimation of future cash flows except that the revenues for the AY 2006-07 has to be considered and is to be taken as the base year for future projection of revenue - Suitable directions have been issued in respect of revenues only and not for the costs. The TPO had, thus, erred in mentioning that there were no specific directions given with respect to the costs of the previous years - The TPO has also erred in mentioning that current year data has to be considered for the projection of future earnings. In fact, specific direction was given, as can be seen from the earlier order that revenues for the current year i.e., 2006-07 has to be considered and is to be taken as the base year for future projections - Decided in favour of assessee. TPO has erred in mentioning that the Marketing Division was non-existence on the date of valuation. The TPO has failed, perhaps, to properly understand that TSPL transferred intangible properties TSFL, Dubai and its marketing division to Tally India Pvt. Ltd and whole subject matter of this valuation is this transfer and the marketing division was in existence before the date of transfer. The transfer of assets and the marketing division is done simultaneously and together. Therefore at the time of transfer of asset, the marketing division was not transferred and it is wrong to assume that the transfer of marketing division has happened prior to the sale of assets - TPO cannot change the method of calculation of cost which was accepted by the earlier Bench as mentioned in the original order and also as discussed above, the assumption of TPO now as different from the original order of the TPO that Marketing division was transferred prior to transfer of assets as the fact remains that both the transfers have taken place simultaneously on 31-01- 2006. TPO has also erred in taking the costs for only 10 months whereas the revenues have been for 12 months. When the revenues are taken for 12 months, the costs have also to be taken for 12 months and not for 10 months. Therefore, the TPO is directed to adopt the costs for 12 months for arriving at CAGR of the cost for the year 2005-06. The TPO has clearly erred in arriving at the revenues for the FY 2004-05 relates to AY 2005-06. As per Step 1, the turnover for the FY 2004-05 relating to FY 2005-06 is ₹ 72,20,84,213/- whereas the TPO has arrived at the turnover at ₹ 198,15,17,988/- which is totally wrong. In the original order passed by TPO, the turnover arrived at Step 1 has been taken in Step 4 also and no specific directions were given by the earlier Bench for arriving at these revenues in this step. The TPO has to reduce sales returns against sales in all the steps and cannot arbitrarily include in some steps. In the earlier order, we had not given specific directions as we found that in the original TP order the revenue are same in Step I and Step 4. - AO directed to adopt the revised/modified transfer pricing adjustment which will be worked out by the TPO - Decided partly in favor of assessee.

Issues Involved:
1. Methodology in computing the value of the IP.
2. Method of valuation and estimation of future cash flows.
3. Calculation of future expenses and 'CAGR of cost'.
4. Reduction of marketing expenses from operating costs.
5. Computation of 'CAGR of cost' for FY 2005-06.
6. Deviation from the method adopted for valuation of IPR.
7. Opportunity to appeal before the DRP.
8. Binding nature of DRP directions on AO.
9. Reduction of sale return from turnover.
10. Computation of return on working capital.
11. Levy of interest u/s 234B, 234D, and 220(2).

Detailed Analysis:

1. Methodology in computing the value of the IP:
The lower authorities were criticized for adopting a flawed methodology in computing the value of the IP. The Tribunal noted that the TPO had deviated from the original method approved by the DRP and the Tribunal, which included the introduction of a new concept called 'CAGR of cost' without proper justification.

2. Method of valuation and estimation of future cash flows:
The Tribunal upheld the Excess Earning Method (EEM) for valuation as reasonable but found inconsistencies in the TPO's application of this method. The TPO's new method, which excluded marketing expenses and considered only ten months of costs for FY 2005-06, was deemed incorrect. The Tribunal directed the TPO to adhere to the original method and consider twelve months of costs for FY 2005-06.

3. Calculation of future expenses and 'CAGR of cost':
The Tribunal found that the TPO's introduction of 'CAGR of cost' was a deviation from the original order. The Tribunal emphasized that the original method, which included marketing expenses, should be followed. The TPO's reliance on an exposure draft from the International Valuation Standards Council was also criticized.

4. Reduction of marketing expenses from operating costs:
The Tribunal noted that the TPO had incorrectly excluded marketing expenses from operating costs, which artificially increased estimated cash flows. The Tribunal directed that marketing expenses should be included in the calculation of costs.

5. Computation of 'CAGR of cost' for FY 2005-06:
The TPO's consideration of only ten months of costs for FY 2005-06 was found to be incorrect. The Tribunal directed that costs for twelve months should be considered to ensure consistency with the revenue calculation.

6. Deviation from the method adopted for valuation of IPR:
The Tribunal found that the TPO had deviated from the original method approved by the DRP and the Tribunal. The Tribunal directed the TPO to follow the original method without introducing new concepts or methodologies.

7. Opportunity to appeal before the DRP:
The Tribunal noted that the assessee was not given an opportunity to appeal before the DRP, which was a procedural lapse. The Tribunal emphasized the importance of following due process and providing the assessee with an opportunity to appeal.

8. Binding nature of DRP directions on AO:
The Tribunal reiterated that the directions of the DRP are binding on the AO and that any deviation from these directions is not permissible. The Tribunal directed the AO to adhere to the DRP's directions.

9. Reduction of sale return from turnover:
The Tribunal found that the TPO had failed to reduce the sale return of Rs.111.04 crores from the turnover, which was contrary to the Tribunal's earlier directions. The Tribunal directed the TPO to reduce the sale return from the turnover in all relevant calculations.

10. Computation of return on working capital:
The Tribunal noted that the TPO had not included inter-corporate deposits and dues receivable from subsidiary companies in current assets, which was incorrect. The Tribunal directed the TPO to include these items in the calculation of return on working capital.

11. Levy of interest u/s 234B, 234D, and 220(2):
The Tribunal dismissed the grounds relating to the levy of interest u/s 234B, 234D, and 220(2), stating that the charging of interest is mandatory and consequential in nature.

Conclusion:
The Tribunal issued fresh directions to the TPO to recalculate the ALP based on the original method and to ensure consistency in the application of costs and revenues. The Tribunal also emphasized the importance of following due process and providing the assessee with an opportunity to appeal. The assessee's appeal was partly allowed, while the Miscellaneous Petition and Stay Petition were dismissed as infructuous.

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