2013 (12) TMI 126 - AT - Income Tax

Transfer Pricing Adjustment Held that - There is no defect in the audited segmental accounts submitted by the assessee - Its entire work depends on the man hours and it is maintaining a system known as TMA which generates monthly reports for the purpose of tracking man hours. The assessee has given the details regarding the man hours utilized by it for the purpose of each project and on the basis of such system the assessee has prepared the segmental accounts - Ceratin expenses such as nature of job work; consulting fee and service charge; staff welfare; rent; rate and taxes; repairs; insurance postal and telegraph; traveling and conveyance; electricity water and gas cannot be said to be non-allocable on the basis of man hours relating to non bidding activity of EPC Division - The difference between ALP determined by the Ld. TPO in respect of AE transactions and ALP charged by the assessee is less than 5% - Decided in favour of assessee. Guarantee Commission Held that - The assessee had issued counter guarantee to its Associated enterprise and had received guarantee commission @ 1.2% per annum - TPO applied 3% guarantee commission - The assessee has not submitted any contradictory evidence to suggest that the rate applied by Ld. TPO at 3% was not appropriate - The evidence submitted by the assessee relates to Bank Guarantee which is less than ₹ 1.00 crore - The said evidence cannot be taken as comparable instance Decided against assessee.

Summary

Issues Involved:
1. Rejection of audited segmental results and following an entity level approach.
2. Rejection of comparable.
3. Incorrect computation of margins.
4. Incorrect margin computation of the appellant at the entity level.
5. Use of single-year data.
6. Variation of 5% from the arithmetic mean.
7. Adjustment on account of corporate guarantee.
8. Tax credits.

Detailed Analysis:

1. Rejection of Audited Segmental Results and Following an Entity Level Approach:
The primary issue involved the rejection of the audited segmental accounts by the Transfer Pricing Officer (TPO) and adopting an entity-level approach for determining the arm's length price (ALP) of international transactions. The TPO rejected the segmental accounts on the grounds that the assessee did not provide sufficient evidence to clarify whether materials/services from Associated Enterprises (AEs) were utilized for non-AE jobs or vice versa. The TPO also noted that the assessee incurred significant losses in non-AE transactions, which were against industry trends. The Dispute Resolution Panel (DRP) upheld the TPO's decision, emphasizing the need for accurate and reliable segmental accounts.

The Tribunal, however, referred to its decision in the assessee's own case for the assessment year 2006-07, where it was held that segmental results should be considered for determining the ALP. The Tribunal found no specific defect in the segmental accounts submitted by the assessee and noted that the assessee maintained a man-hour tracking system to allocate costs accurately. The Tribunal concluded that even if certain expenses were excluded, the margin of the assessee would still fall within the safe harbor range of +/- 5%, leading to the deletion of the addition of Rs. 24,09,18,616.

2. Rejection of Comparable:
The TPO excluded Nicco Corporation Ltd. as a comparable on the grounds of functional differences. The assessee objected to the inclusion of other comparables proposed by the TPO. The Tribunal did not specifically address this issue as the primary ground was resolved in favor of the assessee, making this issue academic.

3. Incorrect Computation of Margins:
The assessee contended that the TPO computed incorrect margins for certain comparables. The Tribunal did not delve into this issue separately as the primary ground was resolved, rendering this issue academic.

4. Incorrect Margin Computation of the Appellant at the Entity Level:
The assessee argued that the TPO incorrectly computed the net profit at the entity level by not including certain operating income heads. The Tribunal's decision to accept the segmental results made this issue academic.

5. Use of Single-Year Data:
The assessee objected to the TPO's use of single-year data for the comparability analysis. The Tribunal did not address this issue separately due to the resolution of the primary ground.

6. Variation of 5% from the Arithmetic Mean:
The assessee claimed that the TPO did not grant the benefit of the proviso to section 92C(2) of the Act, which allows a variation of 5% from the arithmetic mean. The Tribunal allowed this ground, noting that the assessee's margin fell within the safe harbor range after accepting the segmental results.

7. Adjustment on Account of Corporate Guarantee:
The TPO made an addition of Rs. 5,27,907 for the corporate guarantee provided by the assessee, applying a rate of 3% as opposed to the assessee's rate of 1.2%. The Tribunal upheld the TPO's adjustment, finding no contradictory evidence from the assessee to justify the lower rate.

8. Tax Credits:
The assessee contended that the TPO did not allow certain tax credits. The Tribunal noted that appropriate relief had already been given by the Assessing Officer (AO) through rectification, rendering this ground infructuous.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the addition of Rs. 24,09,18,616 after accepting the segmental results and granted the benefit of the 5% variation. Other grounds were rendered academic or dismissed.