2013 (9) TMI 300 - AT - Income Tax

Transfer pricing - ALP - Shifting of profit outside India - Associate Enterprise suffered losses - Held that - entire Chapter X in I.T.Act is devoted to determine Arms Length Price in respect of a cross border transaction made by an Indian entity, which is to be taxed in India. Whether said foreign A.E. is having losses, or otherwise not benefitted in any tax savings in that country, is not matter of examination in this Chapter-X of IT Act - Decided against assessee. Rejection of Appellant s economic analysis - Valid reason not provided - assessee had given twelve comparable instances but it was noted that those instances were in respect of companies in production of glass products . As against that assessee had manufactured glass mosaic . Although it was informed that there was no major player in glass mosaic sector but Revenue Department has selected a comparable instance and bench marked international transaction against Bisazza India Pvt. Ltd. - while adopting TNMM method only profit based comparison is advisable, but start point for every comparison is product which is subject matter of international transaction - fundamental start point for comparison is similarity amongst nature of transaction, which depends upon none other than transaction of product. Without first establishing similarity of product between two comparable how is it practically possible to judge FAR? If nature of transaction is dissimilar in product then that should lead to an incongruous result. economic analysis, therefore, of comparable companies as attempted by assessee was not proper in eyes of law primarily because of reason that those companies were admittedly manufacturing glass wares and not glass mosaic , particularly when revenue department was in a position to lay hand to compare transaction of assessee with a comparable company also dealing in glass mosaic. This product is undisputedly identical with product of assessee manufactured. Without first establishing proximity of products it is difficult to hold that comparables are from same economic segment. And without having intimate economic segment quoted companies can not be treated as comparables . In sequence of preference it is incorrect to hold that functional similarity is to be preferred over and above product similarity - Decided against assessee. First onus of selection of comparables was discharged by assessee. Thereafter it became duty of TPO to find whether those were in fact comparable in all respect or not. At that juncture TPO had emptied basket of comparables of assessee by mentioning that first criteria of similarity of product had failed in said selection of assessee. Rather in this case a subtle allegation of TPO was that assessee has done cherry picking. Once selection of assessee had been discarded then begins duty part of TPO. He is duty bound to select most close comparable instances available to him being in public domain. There can be an initial selection of industry segment - if broad segment has several other sub-segments then naturally next filter is required to be applied. - Decided in favor of revenue. Use of data not in public domain - Benchmarking analysis - Violation of principle of natural justice - Held that - TPO had exercised his powers by invoking provisions of Section 133(6) of IT Act for purpose of collecting information to determine ALP. As far as this power is concerned, same is enshrined under section 92CA(7) of IT Act - information collected after issuing notices under Section 136(6) is required to be communicated to assessee and AO is under obligation to furnish entire information to assessee. In present case, since undisputed fact is that assessee had in fact been given an opportunity to contradict material gathered by TPO - Following decision of MARUTI SUZUKI INDIA LTD. versus ADDITIONAL COMMISSIONER OF INCOME TAX TRANSFER PRICING OFFICER NEW DELHI 2010 (7) TMI 84 - DELHI HIGH COURT . Tax administrator has more information available to them. But requirement is that it would be unfair to apply that information against assessee, unless that data/information is disclosed to assessee so that assessee can safeguard its legal interest - assessee has first entered into international transaction and thereupon to justify ALP he has cited few comparables. But law is that assessee is required to establish that international transaction was ALP transaction. Only to compute ALP it is expected to compare data s with other identical nature of companies, rather than collect information to defend ALP in respect of said international transaction which had already been completed - data of a private limited company as selected by TPO once communicated to assessee and assessee had been granted opportunity to refute same, then requirement of law has been fulfilled by TPO - Decided against Assessee. Arbitrary approach in selection of comparables - Held that - if only one comparable is left then selection is as per lawcomparables which were selected by assessee were not identical in respect of product manufactured. TPO had found that only one company happened to be manufacturing same article i.e. Glass Mosaic. Moreover, comparables which were selected by assessee did not have same line of manufacturing activity - It is not correct to say that merely on ground that TPO could have laid hand on one comparable than he was expected to do more research - ALP can be computed even on basis of one comparable - Following decision of Haworth (India) P. Ltd. Versus Deputy Commissioner of Income-tax 2013 (8) TMI 421 - ITAT DELHI - Decided against assessee. Application of Internal TNMM - Some times it is find that internal comparables may have more direct as also closer relationship to transaction under consideration than external comparables. First similarity is resemblance of product. Likeness of product exported with product sold in domestic market can not be questioned. Even OECD guide lines have suggested an ideal situation with reference to profit indicator that same taxpayer earns in comparable uncontrolled transaction - . A general rule on determination of ALP is that prices may vary across different markets even for transaction involving product. Therefore to achieve comparability it requires that market in which independent and A.E. operate are comparable. Another possibility is that to achieve comparability domestic market sales can be compared with export market sales of that very assessee. By this procedure at least one thing is assured that products manufacture and sold is alike. Then economic factors, management factor, finance involvement etc. are also indistinguishable. These factors being dove tailed, either cross-border or domestic sales, hence impossible to tear apart therefore uniformly applies on both type of transaction of same assessee - internal comparable can be considered but after certain adjustments - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in rejecting the assessee's contention regarding the failure to issue a show-cause notice.
2. Whether there was an intention to shift profits outside India.
3. Whether the rejection of the assessee's economic analysis and comparable companies was valid.
4. Whether the use of data not in the public domain for benchmarking was appropriate.
5. Whether the selection of only one comparable company (BIPL) was justified.
6. Whether the selection of BIPL as a comparable company was erroneous.
7. Whether the risk adjustment for differences in risk profiles was necessary.
8. Whether the transfer pricing addition resulted in discrimination under the Double Tax Avoidance Agreement (DTAA).
9. Whether the benefit of the +/- 5% range should be allowed.
10. Whether the exclusion of abnormal costs while determining the operating profit was correct.
11. Whether the determination of the Arms Length Price (ALP) by taking the value of international transactions was correct.

Detailed Analysis:

1. Failure to Issue Show-Cause Notice:
The assessee contended that the AO failed to issue a show-cause notice, violating the principles of natural justice. The Tribunal dismissed this ground, noting that no specific issue was raised, and these were general grounds.

2. Intention to Shift Profits:
The assessee argued that there was no intention to shift profits outside India as the Associated Enterprise (A.E.) incurred losses. The Tribunal held that Chapter X of the IT Act is devoted to determining the Arm's Length Price (ALP) for cross-border transactions and does not consider the foreign A.E.'s losses. This ground was dismissed.

3. Rejection of Economic Analysis and Comparable Companies:
The assessee selected the Transactional Net Margin Method (TNMM) and chose 12 comparables for benchmarking. The Tribunal found that the TPO rightly rejected the comparables because the products were not identical. The Tribunal emphasized the importance of product similarity over functional similarity and upheld the TPO's rejection of the assessee's economic analysis.

4. Use of Data Not in Public Domain:
The TPO used data from Bisazza India Pvt. Ltd. (BIPL), a private company, for benchmarking. The Tribunal noted that the TPO provided the assessee with an opportunity to inspect BIPL's financial data. The Tribunal held that the use of such data was permissible as long as it was shared with the assessee, ensuring compliance with natural justice principles.

5. Selection of Only One Comparable Company (BIPL):
The Tribunal addressed the objection that selecting only one comparable (BIPL) was arbitrary. It cited precedents allowing the use of a single comparable for TNMM and upheld the TPO's selection of BIPL, finding no fault in the TPO's approach.

6. Selection of BIPL as a Comparable Company:
The assessee argued that BIPL had controlled transactions and should not be used as a comparable. The Tribunal acknowledged the difficulty in finding exact comparables and suggested applying a filter to account for controlled transactions. The matter was remanded to the AO for re-examination.

7. Risk Adjustment:
The Tribunal noted that adjustments for differences in risk profiles were necessary. It directed the AO to re-examine the matter, considering the credit risk and marketing activities undertaken by BIPL.

8. Transfer Pricing Addition and DTAA Discrimination:
The assessee claimed that the transfer pricing addition resulted in discrimination under the DTAA. The Tribunal deferred adjudication on this ground, as the matter was remanded to the AO for re-examination.

9. Benefit of +/- 5% Range:
The Tribunal held that this ground became consequential, as the ALP determination was yet to be finalized. It deferred the application of the +/- 5% range until the ALP was determined.

10. Exclusion of Abnormal Costs:
The CIT(A) excluded abnormal costs incurred by the assessee while determining the operating profit. The Tribunal directed the AO to re-examine this aspect along with other factors.

11. Determination of ALP:
The CIT(A) directed the AO to compute the transfer pricing adjustment only for the value of international transactions. The Tribunal upheld this direction, finding no fallacy in the CIT(A)'s approach.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remanding several issues to the AO for re-examination, including the selection of comparables, application of risk adjustments, and determination of the ALP. The Tribunal emphasized the importance of product similarity in transfer pricing analysis and upheld the use of data not in the public domain, provided it was shared with the assessee.