2013 (12) TMI 594 - AT - Income Tax

Transfer pricing adjustment Comparable data Arm s length price - Held that - Mere difference in turnover is not sufficient for treating two entities or two transactions as not comparable or warrant any adjustment - Following Symantec Software Solutions P. Ltd. 2011 (5) TMI 107 - ITAT MUMBAI - Low turnover does not necessarily mean high margin in competitive market condition - Unless and until it is brought to record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself Following Distributors (Baroda) P. Ltd. v. Union of India 1985 (7) TMI 1 - SUPREME Court - Commission percentage in associated enterprises segment should be compared with commission percentage in non-associated enterprises segment - Following Bayer Material Science P. Ltd. 2011 (12) TMI 393 - ITAT MUMBAI - When the indent/commission transaction with the associated enterprises is to be benchmarked, the same should be done with indent/ commission transaction with non-associated enterprises - Decided against the assessee. Legal and professional charges Held that - The assessee-company employs foreign nationals for the purpose of its business, as they have requisite expert knowledge of the markets outside India - The assessee-company has many of the foreign nationals, on its rolls, working at various managerial positions - As per the general policy of the assessee-company and the market wide practice, the company at the time of the departure of such foreign assignees, after completion of their assignments, bears the cost of their return journey to their respective home countries - The expenditures were incurred by the assessee on its employees who were returning to their home countries, after completion of the assignments. The expenditures were charges in connection with passenger baggage clearing Decided in favour of assessee. Disallowance of deduction of deposits written off Held that - The assessee has debited an amount to the profit and loss account under head Deposits written off - The AO misread the profit and loss account and amount claimed in the assessment year 2006-07 was understood by him as the amount claimed in the assessment year 2007-08 - The such write off was claimed in the assessment year 2006-07 The issue was restored for fresh decision.

Issues Involved:

1. Determination of income by the Assessing Officer.
2. Addition on account of alleged understatement of arm's length price in respect of commission income.
3. Validity of reference to Transfer Pricing Officer (TPO).
4. Disregard of the transfer pricing approach adopted by the appellant.
5. Errors in adopting the arm's length price determination method.
6. Failure to make adjustments for economic differences.
7. Allegation of creation of intangibles without adequate compensation.
8. Different transfer pricing approach from the earlier year despite no change in facts.
9. Disallowance of expenditure on legal and professional charges.
10. Disallowance of deduction of deposits written off.
11. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Determination of Income by the Assessing Officer:

The appellant contested the Assessing Officer's determination of income at Rs. 70,71,96,314 against the declared income of Rs. 15,39,50,749. The appellant argued that the addition of Rs. 55,26,16,748 on account of alleged understatement of arm's length price in respect of commission income from associated enterprises (AE) was erroneous.

2. Addition on Account of Alleged Understatement of Arm's Length Price:

The appellant claimed that the addition was made without any material evidence and was a vitiated finding. The Transfer Pricing Officer (TPO) had used a different method to determine the arm's length price, which the appellant argued was not justified. The appellant used the Transactional Net Margin Method (TNMM) with Berry Ratio as the profit level indicator (PLI), which was discarded by the TPO without valid justification.

3. Validity of Reference to Transfer Pricing Officer (TPO):

The appellant argued that the reference to the TPO was not in accordance with the provisions of section 92CA(1) of the Act. It was claimed that none of the pre-conditions laid down under section 92C(3) were satisfied and that no opportunity of being heard was granted at any stage of the proceedings.

4. Disregard of the Transfer Pricing Approach Adopted by the Appellant:

The appellant contended that the TPO disregarded the transfer pricing approach adopted by the appellant without demonstrating the existence of any of the four conditions provided in section 92C(3). The TPO had recharacterized indent-based transactions as trading transactions without valid basis and compared them with principal transactions of non-associated enterprises.

5. Errors in Adopting the Arm's Length Price Determination Method:

The TPO's method of computing the arm's length price was not in accordance with any of the methods specified in section 92C(1). The appellant argued that the TPO failed to make adjustments to the uncontrolled transaction to account for the material impact of economic differences between the controlled and uncontrolled transactions as mandated under rule 10B(3) of the Income-tax Rules, 1962.

6. Failure to Make Adjustments for Economic Differences:

The appellant argued that the TPO failed to make adjustments to account for the economic differences between the controlled and uncontrolled transactions. The appellant cited the difference in risk profiles and the nature of transactions, such as negligible credit risk and foreign exchange risk in indent-based transactions.

7. Allegation of Creation of Intangibles Without Adequate Compensation:

The TPO alleged that the appellant created human and supply chain intangibles for which it was not adequately compensated by the associated enterprises. The appellant refuted this claim, stating that the activities performed were routine, preparatory, and auxiliary in nature and did not create any intangibles.

8. Different Transfer Pricing Approach from the Earlier Year Despite No Change in Facts:

The appellant argued that the TPO adopted a different transfer pricing approach from the earlier year despite there being no change in the facts and circumstances of the case. The appellant cited the rule of consistency, emphasizing that the same methodology should be followed unless there are significant changes in the business model or transactions.

9. Disallowance of Expenditure on Legal and Professional Charges:

The Assessing Officer disallowed Rs. 3,72,560 representing legal and professional charges, claiming it to be personal expenditure. The appellant argued that the expenditure was incurred wholly and exclusively for the purpose of business and that a company does not have personal expenditure.

10. Disallowance of Deduction of Deposits Written Off:

The Assessing Officer disallowed Rs. 2,56,257 on account of deposits written off, stating that the appellant did not offer any explanation. The appellant contended that this amount was debited in the previous year and not in the year under consideration.

11. Initiation of Penalty Proceedings Under Section 271(1)(c):

The appellant raised concerns about the initiation of penalty proceedings under section 271(1)(c), arguing that the validity of such initiation was not examined by the Dispute Resolution Panel.

Conclusion:

The Tribunal partly allowed the appeal, agreeing with the appellant on several points, including the nature of indenting transactions being different from trading transactions and the need for appropriate comparison of commission/service income earned from associated enterprises to that of non-associated enterprises. The Tribunal also deleted the disallowance of legal and professional charges and deposits written off, emphasizing the need for consistency and proper examination of facts.

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