2014 (1) TMI 74 - AT - Income Tax

Transfer pricing adjustments - Reduction in amount of Depreciation - Cash profit to Total cost as Profit Level Indicator (PLI) - The assessee demonstrated through its TP study that the price charged or paid to its AEs was at the ALP - The TPO made certain exclusions from the list of comparables which led to the making of TP adjustment - the TP adjustment was eventually made by the AO, it was naturally possible for the assessee to take up its matter before the learned CIT(A) for the first time - the claim of having higher rate of depreciation did not come to be considered for the first time - all the relevant details were already available on record and the assessee simply required the examination of its claim before the CIT(A) Following Dy. CIT v. Quark Systems (P) Ltd. 2009 (10) TMI 591 - ITAT, CHANDIGARH Decided against Revenue. Adoption of Cash profit to Operating cost as the PLI Held that - The CIT(A) has allowed the claim of exclusion of depreciation by considering the fact that in subsequent assessment year i.e. 2007-2008 TPO has accepted the same, thus, the principle of consistency cannot be ignored the CIT(A) was justified in applying Cash profit/Operating cost as the correct PLI under Transactional Net Margin Method and resultantly deleting the addition Decided Against Revneue.

Summary

Issues Involved:
1. Reduction of depreciation amount and application of Cash profit to Operating cost as Profit Level Indicator (PLI) under Transactional Net Margin Method (TNMM).
2. Non-applicability of the principle of res judicata.

Analysis:

Issue 1: Reduction of Depreciation Amount and Application of Cash Profit to Operating Cost as PLI
The appeal was against the order passed by the Commissioner of Income-tax (Appeals) regarding the assessment year 2005-2006. The primary grievance raised in the appeal was related to the reduction of depreciation amount and the application of Cash profit to Operating cost as PLI under TNMM. The assessee, engaged in IT enabled services, had entered into international transactions with its Associated Enterprises (AEs) and applied TNMM to determine the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) had restricted the list of comparables, leading to a proposed adjustment of Rs. 10.38 crore. During the first appellate proceedings, the assessee argued for considering Cash profit/Operating cost as the PLI, showcasing that the price charged to or from AEs was at ALP. The learned CIT(A) remitted the matter to the TPO for verification, and based on the TPO's remand report and the assessee's working, the addition of Rs. 10.38 crore was deleted.

Issue 2: Non-Applicability of Principle of Res Judicata
The contention regarding the non-applicability of the principle of res judicata in the case of different assessment years was addressed. The learned Departmental Representative argued against the adoption of Cash profit as the numerator in the PLI, citing Rule 10B(1)(e). However, the learned Counsel for the assessee highlighted previous orders where the TPO had accepted Cash profit/Operating cost as the PLI for other assessment years. The Tribunal observed that the principle of consistency should not be ignored, especially when the TPO had accepted the same ratio in the assessee's case for previous assessment years. The Tribunal upheld the decision of the learned CIT(A) to apply Cash profit/Operating cost as the correct PLI under TNMM, leading to the deletion of the Rs. 10.38 crore addition.

In conclusion, the appeal was dismissed, and the order pronounced on April 26, 2013, upheld the application of Cash profit to Operating cost as the PLI under TNMM, resulting in the deletion of the proposed adjustment amount.