2013 (8) TMI 421 - AT - Income Tax

Adjustment in regard to marketing support services segment - Non reduction of suo motu disallowance of commission expenses - Held that - commission expenditure which have been disallowed were payments claimed to be made to local dealers for assistance in procuring orders for the products of the assessee s associated enterprises from the Indian customers - Dispute Resolution Panel mistakenly written amount of profit of assessee - Transfer Pricing Officer has wrongly computed the margin of the assessee at 1.35 percent and if the said correction is made then the profit margin will be 9.63 percent - it cannot be said that commission expenses which have been suo motu disallowed by the assessee were not claimed as operating expenses while computing the arm s length price. If they are subsequently disallowed suo motu by the assessee in the revised return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin should have been taken according to the income computed in the revised return for which the assessee has also paid the due taxes - Decided in favour of assessee. Rejection of three comparables out of five comparables selected by the assessee - Non availability of the current year s financial data - Held that - only current year financial data is relevant for determination of the arm s length price - sub-rule (4) of rule 10B clearly states that the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. The proviso carves out an exception that the data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of the transfer price in relation to the transactions being compared - Following decision of Mentor Graphics (Noida) (P.) Limited. Versus Deputy Commissioner Of Income-tax, Circle 6(1), New Delhi 2007 (11) TMI 339 - ITAT DELHI-H - Decided against assessee. Determination of arm s length price - Only one comparable taken as basis - Held that - Four comparables were involved in different lines of business and, therefore, did not meet requirements of rule 10C, which was a major factor in judging comparability of a case on facts, ALP was to be determined only on basis of remaining one comparable - proviso as it existed for the relevant assessment year states that where more than one price is determined by the most appropriate method, ALP shall be taken to be arithmetical mean of such price, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean - provision is applicable where more than one price is determined by the appropriate method - Following decision of Vedaris Technology (P.) Ltd. Versus Assistant Commissioner of Income-tax 2010 (3) TMI 898 - ITAT DELHI and Perot Systems TSI (India) Ltd. Versus Deputy Commissioner of Income-tax, Circle-14(1), New Delhi 2009 (10) TMI 638 - ITAT DELHI - Decided against assessee. Exclusion from operating expenses - Expenses incurred prior to the commencement of manufacturing activity - Held that - what are operational expenses are the expenses which are incurred to earn that income. It is not even the case of the assessee that those expenses did not relate to manufacturing segment of the assessee out of which the revenue was earned by the assessee. If the expenses have nexus with the revenue then they are to be considered as operational expenses and they cannot be excluded simply for the reason that the date of occurrence of the revenue is later and expenses have been incurred prior to that - Decided against assessee. Deviation from net profit shown in books - Held that - There cannot be any deviation in the net profit shown in the books of account and adjustment, if any, can be made to the same to eliminate the material effects of such differences to the extent these adjustments are reasonably accurate. Therefore, the position emerges is that the adjustments can be granted to the assessee in computation of the mean margin only to the extent of these being reasonably accurate - Decided against assessee. Computation of profit margin - Adjustment on capacity utilisation - every person who has entered into an international transaction is under an obligation to keep and maintain the information and documents with respect to the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm s length price. The Transfer Pricing Officer in its report has observed that the assessee did not submit any evidence for assuming the capacity utilisation of the comparables and whatever data relied upon by the assessee for seeking capacity utilisation adjustment was either unreliable or incorrect. When fixed cost itself is incurred only for a part of the year the same cannot be adjusted for differential capacity utilisation - Therefore, decided against assessee. Arm s length price determined on application of the most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to cases who opt for such benefit. In the case of a taxpayer who exercises the option and accepts the arm s length price as per the second limb of the proviso or in other words, he accepts the arm s length price even exceeding 5 percent of arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between price disclosed by him and the above arm s length price. We do not see any valid objection on the part of the Revenue to the application of the above provision to such a case - Therefore, 5 percent is not available to the assessee with respect to marketing support service segment and it is available to the assessee with regard to manufacturing segment - Decided partly in favour of assessee. Disallowance u/s 40(a)(ia) - It has not been shown by the assessee that how these expenditure, which are claimed as provision, had accrued in the year under consideration. No details whatsoever have been filed in the paper book as no reference in the written submission regarding evidence has been made - There being no evidence on record to prove that these provisions were not in the nature of contingent liability - Decided against assessee. Depreciation - Whether printers and UPS can be classified as computer entitled to depreciation at 60% or have to be classified as general plant and machine entitled to depreciation only at 25% - Section 32, which grants depreciation allowance, does not define the word Computer - As per the General Clauses Act, 1897, if a particular word is not defined in the Central statute then meaning given to such expression under General Clauses Act may be considered for guidance and adoption in the former enactment - Thus in order to determine whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account - In the case of ITO Vs. Samiran Majumdar (2006) 280 ITR (AT) 74 (Kol.) ITAT, Kolkata Bench - Held that when a device is used as part of the computer in its functions, then it would be termed as a computer - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Matters
2. Marketing Support Services Business
3. Manufacturing Business
4. General Grounds
5. Corporate Tax Matters

Detailed Analysis:

1. Transfer Pricing Matters:
- Rejection of Approach for Transfer Pricing Analysis: The Assessing Officer (AO) and Dispute Resolution Panel (DRP) rejected the approach adopted for transfer pricing analysis, resulting in a transfer pricing adjustment of Rs. 5,45,54,363 by holding that the international transactions of the 'manufacturing segment' and the 'marketing support services segment' did not satisfy the arm's length principle under the Income-tax Act, 1961.
- Consideration of Commission Expenses as Operating Expenses: The DRP/AO considered commission expenses of Rs. 1,32,09,105 as operating expenses for transfer pricing analysis, despite accepting the same as not being wholly and exclusively for business purposes under section 37 of the Act, leading to double taxation.
- Rejection of Adjustments for Underutilized Capacity: The DRP/AO rejected adjustments made on account of underutilized capacity and pre-commencement expenses, disregarding the fact that the manufacturing business was in a start-up stage.
- Use of Single Comparable: The DRP/AO disregarded the detailed factual analysis and functional comparability presented by the appellant and determined the arm's length nature of the transactions using only a single comparable.
- Benefit of +/- 5% Range: The DRP/AO did not grant the benefit of +/- 5% range as envisaged by the proviso to section 92C(2) of the Act.

2. Marketing Support Services Business:
- Double Taxation of Commission Expenses: The commission expenses of Rs. 1,32,09,105 were considered as operating expenses for transfer pricing purposes, leading to double taxation. The Tribunal found that the commission expenses, which were later disallowed suo motu by the assessee, should have been excluded from the operating cost.
- Rejection of Comparables: The DRP/AO rejected three out of five comparables selected by the appellant due to non-availability of current year data. The Tribunal upheld this rejection based on the provisions of rule 10B(4) and relevant case law.
- Use of Single Comparable: The Tribunal rejected the appellant's contention that the arm's length price could not be determined using a single comparable, upholding the use of Priya International Ltd. as the sole comparable.

3. Manufacturing Business:
- Pre-Commencement Expenses: The Tribunal rejected the appellant's claim for considering a sum of Rs. 1,28,04,653 as pre-commencement expenses, as no preoperative expenditure was shown in the profit and loss account.
- Adjustment for Capacity Utilization: The Tribunal upheld the rejection of the appellant's claim for adjustment on account of capacity utilization due to the lack of credible and accurate evidence.
- Computation of Adjustment to Profit: The issue of computing the quantum of adjustment to the profit of the manufacturing segment was remanded to the DRP for a speaking order after considering the appellant's submissions.

4. General Grounds:
- Benefit of +/- 5% Range: The Tribunal held that the benefit of +/- 5% range was available to the manufacturing segment but not to the marketing support services segment.
- Initiation of Penalty Proceedings: The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(1)(c) as premature.
- Rejection of Contentions Without Reasons: The Tribunal directed the DRP to reconsider issues where contentions were rejected without appropriate reasons.

5. Corporate Tax Matters:
- Provision for Expenses: The Tribunal upheld the disallowance of Rs. 40,94,915 towards provision for certain expenses due to the lack of evidence proving that these expenses had actually accrued during the year under consideration.
- Depreciation on Computer Peripherals: The Tribunal allowed the appellant's claim for depreciation at 60% on computer peripherals, directing the AO to compute the depreciation accordingly.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on certain grounds while upholding the AO/DRP's decisions on others. The Tribunal emphasized the need for credible evidence and proper documentation to support claims for adjustments and deductions.