2014 (3) TMI 63 - AT - Income Tax

Arm s length price adjustment u/s 92C of the Act Method for determination of ALP - Whether the AO was justified in making an arm s length price (ALP) adjustment u/s 92 C of the Act Held that - The inputs are not the independent quotes , as referred to by the TPO, but only compilation of the data available in public domain - the Transfer Pricing Officer was clearly in error in rejecting these inputs on the ground that such information is not covered by Rule 10D (3) for the simple reason that Rule 10 D(3) is only illustrative in nature and it merely describes the information, required to be maintained by the assessee under section 92 D of the Act - The information furnished by the database used by the assessee is fairly comprehensive information, including description and prices as per invoices presented to customs a fact noted by the TPO himself, which can be cross checked and verified, in case of doubts - As a quasi -judicial authority, and while pursing the goal of justice, one cannot remain at the mercy of the wisdom of representatives of the parties appearing before such an authority - it is bounden duty of every quasi -judicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place - It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability - Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach CUP method does provide for a reasonable, even if not perfect, solution to the distortion which may creep in case comparison of prices is done on day to day basis, and due to limited comparables being available for the same Relying upon Serdia Pharmaceuticals Pvt Ltd Vs ACIT 2010 (12) TMI 60 - ITAT, Mumbai - the ALP determination under CUP Method on the basis of Daily Export Port Data April 2007- March 2008 , by adopting quarterly averages, was wrongly rejected by the TPO and the DRP - the application of CUP has been approved method in principle - Decided in favour of Assessee.

Issues Involved:
1. Justification of the Assessing Officer's ALP adjustment.
2. Appropriate method for determining the ALP.
3. Rejection of the CUP method and application of TNMM.
4. Export turnover filter applied by the TPO/AO.
5. Exclusion of 'Other Income' from operating margin.
6. Adjustments for differences in working capital.
7. Adjustments for differences in capacity utilization and excess depreciation.
8. Proportional computation of adjustment to the value of international transactions.
9. Benefit of the arm's length range under Section 92C.
10. Initiation of penalty proceedings for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Justification of the Assessing Officer's ALP Adjustment:
The core issue was whether the Assessing Officer was justified in making an ALP adjustment of Rs. 26,07,70,513 under section 92C of the Act. The taxpayer contended that the adjustment was made without appropriate justification and mechanically relied on the TPO's order.

2. Appropriate Method for Determining the ALP:
The taxpayer argued that the CUP method was the most appropriate for determining the ALP, as it directly compared prices with those in the international market. The TPO, however, rejected the CUP method, citing the need for stringent comparability and the inability to make accurate adjustments for differences in the transactions.

3. Rejection of the CUP Method and Application of TNMM:
The TPO rejected the CUP method, stating that the data from Tips Software Services Pvt Ltd was not covered under Rule 10D(3) and that the product comparability was not stringent enough. The TPO instead applied the TNMM method. The Tribunal found that the TPO's rejection of the CUP method was erroneous, as the data from Tips Software was based on publicly available customs data, and Rule 10D(3) is illustrative, not exhaustive.

4. Export Turnover Filter Applied by the TPO/AO:
The taxpayer contended that the TPO/AO applied an export turnover filter of 25% while applying TNMM, instead of the 50% proposed by the taxpayer, without providing cogent reasons. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

5. Exclusion of 'Other Income' from Operating Margin:
The taxpayer argued that the DRP erred in excluding the entire 'Other Income' while computing the operating margin. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

6. Adjustments for Differences in Working Capital:
The taxpayer contended that appropriate adjustments for differences in working capital were not allowed. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

7. Adjustments for Differences in Capacity Utilization and Excess Depreciation:
The taxpayer argued that adjustments for differences in capacity utilization and excess depreciation were not allowed. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

8. Proportional Computation of Adjustment to the Value of International Transactions:
The taxpayer contended that the adjustment was not computed proportionate to the value of international transactions. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

9. Benefit of the Arm's Length Range under Section 92C:
The taxpayer argued that the benefit of the arm's length range was not provided. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

10. Initiation of Penalty Proceedings for Furnishing Inaccurate Particulars of Income:
The taxpayer contended that the AO erred in initiating penalty proceedings under section 274 read with section 271 of the Act. The Tribunal did not address this issue directly due to the acceptance of the CUP method.

Conclusion:
The Tribunal held that the CUP method was indeed the most appropriate method for determining the ALP on the facts of this case. The Tribunal found that the TPO erred in rejecting the data from Tips Software Services Pvt Ltd and that the CUP method should be applied using quarterly averages. The Tribunal remitted the matter to the Assessing Officer for fresh determination of the ALP under the CUP method, considering the observations made. Consequently, the issues relating to the application of the TNMM method and the comparables selected for that purpose were deemed academic and not addressed. The appeal was allowed for statistical purposes.

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