2013 (10) TMI 872 - AT - Income Tax

Method for Computing Arm s length Price Opportunity of Being Heard Addition under Arm s Length Price Comparison of Like with Like Held that - it is quite clear that no such addition has been ultimately made in the computation of income by the Assessing Officer and tax liability in relation to such adjustment has not been determined against the assessee - the only premise that can be drawn is that the grievances raised in the Grounds of Appeal relating to the addition in respect of international transactions of the manufacturing wire segment, as proposed by the TPO in his order do not arise out of the impugned order of the Assessing Officer passed under Section 143(3) read with Section 144C(13) of the Act - the Grounds do not require any adjudication for the present - if in future the Assessing Officer takes steps to give effect to the said addition and determine tax liability thereof, assessee shall be at liberty to appeal against such addition, if so advised in law - the Grounds of Appeal in respect of international transactions of manufacturing wire segment was dismissed as they do not arise out of order of the Assessing Officer - Decided against Assessee. Rejection of Transfer Pricing Analysis Held that - The TPO has clearly misdirected himself in computing the transfer pricing adjustment in respect of all transactions of the assessee's Tools manufacturing segment and not limiting it to the transactions with the AEs - the entire exercise of conducting a transfer pricing analysis is to compute ALP of an international transaction alone - the adjustment that is required to be made is to be limited to the international transactions with the AEs and not to the entity/segmental level transactions Relying upon IL Jin Electronics (I) (P.) Ltd. Versus Assistant Commissioner of Income-tax , Circle-11(1), New Delhi 2009 (11) TMI 669 - ITAT DELHI - There was enough merit in the plea of the assessee and conclude by directing the Assessing Officer to re-compute the adjustment only with regard to the transactions in the Tools manufacturing segment carried out with the AEs and not to the entire transactions in the segment which include the transactions with the non-AEs also - Decided in favour of Assessee. Opportunity of Being Heard Held that - Following Tin Box Company vs. CIT 2001 (2) TMI 13 - SUPREME Court - once it is established that the Assessing Officer had not given to the assessee an appropriate opportunity of being heard, that the assessee had an opportunity before the higher appellate authorities was really of no consequence, for it was the assessment order that counted inasmuch as the assessment order was required to be made only after the assessee had been allowed a reasonable opportunity of being heard - The issue of the PLI adopted by the assessee in respect of Tools manufacturing segment of Operating Profit/Operating Revenue is concerned, the same has been altered by the TPO without giving the assessee any opportunity of being heard - the matter ought to be remanded back to the AO/TPO for consideration afresh Decided in favour of Assessee. Addition made in Arm s Length Price Held that - For the purpose of determination of ALP, an international transaction has to be compared with uncontrolled and unrelated transactions by using the data relating to the financial year in which the international transaction has been entered into - the assertion of the TPO that the said concern is functionally incomparable is a mere bald assertion devoid of factual support - the action of the TPO in excluding the said concern is not well founded and is liable to be set-aside - it cannot be said that the concern is consistently loss-making and accordingly, there was not enough reasons to sustain the action of the TPO in excluding the said concern from the list of comparable - the PLI of assessee's Tools management segment is higher than the arithmetic mean of comparable margins, thus the international transactions between the assessee and the AEs in respect of Tools management segment can be considered to be at arm's length price from the Indian Transfer pricing perspective Decided in favour of Assessee. The Assessing Officer is directed to re-compute the ALP of the international transactions in respect of the Tools manufacturing segment.

Issues Involved:
1. Validity of the impugned order.
2. Rejection of the transfer pricing analysis by the assessee.
3. Selection of the Transactional Net Margin Method (TNMM) for benchmarking international transactions.
4. Adoption of Cost Plus Method by the Assessing Officer.
5. Addition to the income based on the transfer pricing adjustments in the Manufacturing - Tools segment.
6. Addition to the income based on the transfer pricing adjustments in the Manufacturing - Wires segment.
7. Application of the proviso to Section 92C(2) of the Act.
8. Use of multiple-year data for comparables.

Detailed Analysis:

1. Validity of the Impugned Order:
The assessee challenged the legality of the impugned order, claiming it was not in accordance with law and statutory provisions. However, this ground was general and required no adjudication, thus it was dismissed.

2. Rejection of Transfer Pricing Analysis:
The assessee contended that the Assessing Officer (AO) erred in rejecting its transfer pricing analysis by aggregating international transactions. The AO's jurisdiction should be limited to transactions with Associated Enterprises (AEs) alone and not include non-AE transactions. The Tribunal agreed, directing the AO to re-compute the adjustment only concerning AE transactions, not the entire segment.

3. Selection of TNMM:
The AO rejected the TNMM adopted by the assessee without proper opportunity for the assessee to be heard. The Tribunal found that the AO altered the Profit Level Indicator (PLI) without giving the assessee an opportunity to justify its selection. The matter was remanded back to the AO/TPO for reconsideration, ensuring the assessee is given a fair hearing.

4. Adoption of Cost Plus Method:
The AO adopted the Cost Plus Method for computing the arm's length price (ALP) without proper opportunity for the assessee to be heard. This issue was intertwined with the selection of TNMM and was remanded for reconsideration.

5. Addition to Income in Manufacturing - Tools Segment:
The AO made an addition of Rs. 30,70,02,006/- by holding that international transactions in the Tools segment were not at arm's length. The Tribunal found that the AO unjustly excluded Rajasthan Udyog & Tools Ltd. and Hittco Tools Ltd. from the list of comparables, although they were accepted in previous years. The Tribunal directed the AO to include these companies in the comparables list and re-compute the ALP.

6. Addition to Income in Manufacturing - Wires Segment:
The AO proposed an addition of Rs. 60,48,143/- for the wire segment, but it was not actually added in the final computation of income. The Tribunal noted that since no tax liability was determined, the grounds related to this addition did not arise from the impugned order and were dismissed. However, the assessee was allowed to appeal if the AO takes steps to give effect to the addition in the future.

7. Application of Proviso to Section 92C(2):
The AO failed to apply the proviso to Section 92C(2) of the Act. This ground was treated as infructuous since the Tribunal's decision on other grounds rendered it academic.

8. Use of Multiple-Year Data:
The AO did not use multiple-year data for comparables as mandated by Rule 10B(4) of the Income-tax Rules, 1962. This ground was also treated as infructuous due to the Tribunal's decision on other grounds.

Conclusion:
The Tribunal directed the AO to re-compute the ALP of the international transactions in respect of the Tools manufacturing segment, including the previously excluded comparables and ensuring a fair hearing for the assessee. The appeal was partly allowed, with specific grounds dismissed as they did not arise from the impugned order or were rendered academic.

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