2013 (8) TMI 670 - AT - Income Tax

Reference made to TPO by Assessing Officer Whether Section 92C and 92CA of the income tax act are independent of each other Held that - Proceedings in both the sections are quite independent of and distinct from each other and the proceedings under section 92CA(1) of the Act are not dependent on the proceedings under section 92C(3) of the Act. This is due to historical reasons as two provisions were introduced at different times as noted above. The expression necessary or expedient is quite distinct from and independent of the circumstances mentioned in section 92C(3). The Assessing Officer may consider it necessary or expedient to refer the case of the assessee to the TPO even without considering existence of circumstances mentioned in section 92C of the Act. The Assessing Officer has only to be satisfied that it is necessary or expedient to make a reference to the T.P.O. No other condition is prescribed in the provision - Assessing Officer would consider it necessary or expedient would depend upon facts of each case. No doubt even in cases covered by section 92C(3) of the Act the Assessing Officer may in appropriate cases consider it necessary or expedient to refer the case of the assessee to the TPO for determining the ALP but that does not mean that powers of the Assessing Officer to refer the case to the TPO is restricted to those cases which are covered by section 92C(3) of the Act. Had the legislature contemplated to refer the case of the assessee to the TPO only in the circumstances mentioned in section 92C(3) then the legislature would have to provide such conditions in place of words necessary or expedient in sub-section (1) of section 92CA. The requirements under both the sections are quite distinct as procedure to be followed in the sections is different. In the above sub-section 92CA(1) there is no reference to section 92C(3) - The CIT(A) has emphasized on the words the said international transaction under section 92C . These words only refers to the transaction in respect of which reference can be made to the TPO but the same does not lead to the conclusion that the requirement of section 92C(3) can be read into section 92CA(1) of the Act The view of this court is relying upon the decision of the Hon ble Delhi High Court in the case of Sony India (P.) Ltd. v. CBDT 2006 (10) TMI 88 - DELHI HIGH COURT - Decided against the Assessee. Companies having higher profits included in comparable for computation of Arm s Length price - To include Gemini Communication as comparable - The objection against the Gemini Communication Ltd. was raised by the assessee on the ground that the said company is having a super normal profit at 28.07% Held that - Profit at 28.07% is not a super normal because the decision relied upon by the assessee in support of its contention are based on the fact where the profit of the comparable as noted by the Tribunal was ranging from 50% to 100% and in those circumstances the Tribunal held that the cases where exceptional profit has been earned and termed as super normal profit should be excluded from the comparables. Therefore when the profit in case of Gemini Communication does not fall in the category of super normal then merely because of high profits margin cannot be a factor for exclusion from proposed comparables until and unless the extreme results of a case are as a result of exceptional conditions exist. Even as per OECD TP guidelines the extreme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results then only the case may be excluded from the proposed comparables. Exclusion of Punjab Communication Ltd. from the list of comparables for computation of Arm s Length Price Held that - The said company is a persistent loss making company - For the last four years this company has been consistently suffering loss - The persistence loss from year after year itself shows existence of exceptional and extreme circumstances and therefore is a good reason for exclusion of the company from comparables. There is a consistence view of this Tribunal on this point that a company showing persistent losses from year after year cannot be considered as a good comparable for the purpose of determination of ALP. Use of multi-year data for selecting comparables Held that - Data relating to the financial year in which the international transaction has been entered into to be used for computation of Arm s Length Price - It is stipulated under Rule 10B(4) r.w.s Rule 10D(4) that contemporaneous information and documents should be considered as far as possible for the purpose of comparing uncontrolled transaction with the international transaction. Therefore the comparability of an uncontrolled and unrelated transaction with the international transaction has to be tested by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of some abnormal circumstances the multi year data can be considered. Use of data by the TPO after the cut off date Held that - There is no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study / documentation Benefit of proviso to section 92C(2) of the Income Tax Act Held that - The benefit of proviso to section 92C(2) is available only when the price of international transaction of the assessee is within the tolerance range of 5% of the ALP computed by taking the arithmetic mean of more than one price - Benefit under the proviso to section 92C(2) is available only as a tolerance range and not as a standard deduction. Accordingly allowed the benefit of the proviso if the prices of the international transaction of the assessee are within the tolerance range of 5% of the arithmetic mean of more than one comparable prices. Effect of financial results on TPA Held that - Under the Transfer Pricing regulation/provisions the testing party is the assessee and the international transaction entered into by the assessee has to be tested by comparing the same with uncontrolled unrelated comparable transaction - Price of international transaction in the hand of the AE of the assessee is absolutely irrelevant. The concept of Transfer Pricing based on the principle that instead of entering into a transaction with related party if the assessee had entered into a similar transaction with unrelated party what would have been the prices of said transaction between the assessee and unrelated party. The comparison is always in the context of the effect of the related party transaction and unrelated party transaction at the hand of the assessee. Therefore the financial results of the AE are not at all relevant for the purpose of determination of arm s length price in relation to the international transaction entered into by the assessee. - Decided against the assessee.

Summary

Issues Involved:
1. Validity of reference to the Transfer Pricing Officer (TPO).
2. Transfer pricing adjustments and comparables.
3. Incorrect margins of the assessee and comparables.
4. Adjustment for differences in working capital.
5. Use of single year data versus multiple year data.
6. Consideration of data not available at the time of preparing the transfer pricing documentation.
7. Application of the proviso to section 92C(2).
8. Adjustment restricted to the quantum of international transactions.
9. Consideration of operational losses of the parent company.
10. Addition on protective basis due to AIR reconciliation.

Detailed Analysis:

1. Validity of Reference to TPO:
The assessee challenged the reference made by the Assessing Officer (AO) to the TPO, arguing that the AO did not record any reasons for the referral. The Tribunal upheld the AO's action, referencing the decision of the Special Bench in Aztec Software & Tech. Ltd. v. Asstt. CIT, which clarified that the AO is not required to demonstrate the existence of specific circumstances before referring the case to the TPO. The Tribunal concluded that the AO's satisfaction that it was necessary or expedient to refer the case was sufficient.

2. Transfer Pricing Adjustments and Comparables:
The assessee contested the rejection of Punjab Communication Ltd. (PCL) as a comparable and the inclusion of Gemini Communication Ltd. The Tribunal found that PCL was a persistent loss-making company and upheld its exclusion. Conversely, the Tribunal remanded the issue of Gemini Communication's functional comparability to the TPO for further examination, emphasizing that high-profit margins alone do not justify exclusion unless due to exceptional conditions.

3. Incorrect Margins of the Assessee and Comparables:
The assessee did not press this ground, and it was dismissed as not pressed.

4. Adjustment for Differences in Working Capital:
The Tribunal remanded the issue to the TPO for proper examination, as the TPO had not adequately considered the details provided by the assessee regarding working capital adjustments.

5. Use of Single Year Data versus Multiple Year Data:
The Tribunal upheld the use of single-year data, stating that contemporaneous information should be used unless exceptional circumstances justify the use of multiple-year data. The Tribunal found no such exceptional circumstances in this case.

6. Consideration of Data Not Available at the Time of Preparing Transfer Pricing Documentation:
The Tribunal ruled that the TPO could use contemporaneous data available in the public domain at the time of the transfer pricing audit, even if it was not available to the assessee when preparing the transfer pricing documentation.

7. Application of the Proviso to Section 92C(2):
The Tribunal directed the AO/TPO to allow the benefit of the proviso to section 92C(2) if the prices of the international transactions were within the tolerance range of +/-5% of the arithmetic mean of the comparable prices.

8. Adjustment Restricted to the Quantum of International Transactions:
The Tribunal agreed that any adjustment on account of transfer pricing should be restricted to the income from international transactions and not to the entity-level income. The AO/TPO was directed to restrict the adjustment accordingly.

9. Consideration of Operational Losses of the Parent Company:
The Tribunal dismissed this ground, stating that the financial results of the parent company are irrelevant for determining the arm's length price of the assessee's international transactions. The focus should be on comparing the assessee's transactions with uncontrolled, unrelated transactions.

10. Addition on Protective Basis Due to AIR Reconciliation:
The Tribunal directed the AO to verify the relevant information regarding the AIR reconciliation and decide the issue accordingly. The AO was instructed to rectify any mistakes before making the addition.

Conclusion:
The appeal was partly allowed, with specific issues remanded for further examination and others dismissed or upheld based on the Tribunal's detailed analysis. The Tribunal emphasized the importance of functional comparability, the use of contemporaneous data, and restricting adjustments to the quantum of international transactions.