2014 (7) TMI 639 - AT - Income Tax

Validity of revised return - Whether Assessee s return filed along with TP report is to be considered or not Held that - with the original return, assessee failed to include statutorily prescribed TP documentation and Assessee declared the value of international transaction as per its accounts books. Therefore, the other/revised return filed on 29-11-2006 enclosing TP documentation and declaration of higher value of international transaction by making suo-moto adjustment under the provisions of the Act cannot be rejected as the same was a valid return, even though, stated to be filed u/s 139(5) of the Act. - AO directed to consider the revised return as a valid return The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD followed - Decided in favour of Assessee. Validity of AO s adjustment Suo-moto adjustment ignored - Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not Held that - The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD followed - the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee - For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the net profit realised to arrive at the arm s length price in relation to the international transaction as provided under 10B(e)(v) - The AO is directed to consider suo-moto adjustment made by Assessee accordingly Decided in favour of Assessee. Adoption of operating cost - Whether operating cost adopted by TPO is correct or not Held that - Without considering the objections of Assessee, TPO determined the operating cost based on the proportionate cost on the ratio of sales in various segments - The action of the TPO was not justified at all when Assessee has maintained separate books of account, which was also accepted under the provisions of the Act - The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD followed - Decided in favour of Assessee. Selection of comparables Held that - The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD followed - There are two sets of objections on the comparables selected by TPO; one being data pertaining to companies which have different accounting period than that of Assessee and the second one being the functional comparability of selected companies, being in business of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors) - selection of comparables by TPO suffers from these basic deficiencies, the matter required re-examination thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Invocation of threshold limit - Whether ( )/(-) 5% threshold limit available under the Act can be invoked Held that - the actual transaction undertaken by Assessee should be the base and not revised transaction reported by making suo-moto adjustment - the Assessee exercised option provided u/s 92C particularly of proviso of ( ) or (-) 5% threshold and did not treat the actual sale transaction as ALP no assessee cannot contend that the threshold of (-) or ( ) 5% is available again, if TPO action results in further addition The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD followed - Decided against Assessee. Determination of ALP - Addition to CADEM segment Software engineering services Held that - The comparables companies should be excluded from the computation of PLI - the mean PLI of the rest of the comparables selected by the TPO would come to 18.19% and this is within the margin as arrived at by the assessee, after making adjustments to the working of the TPO - these aspects require examination by the TPO the TPO is directed to consider exclusion of the comparables and to restrict the addition to the AE transactions only - AO/TPO is free to consider whether proportionate cost of Marketing Director salary is to be included in operating cost or not, depending on the nature of his employment and also to examine whether assessee s contention that he was employed at the end of the year has any bearing on issue so the cost should not be included for the working of this year - to the extent of addition made on CADEM segment, the orders of the TPO and DRP are set aside thus, the matter is remitted back to the TPO/AO Decided in favour of Assessee. Expenses on Daughter s Marriage Benefit fund Held that - The amount is an allowable deduction u/s 37(1) of the Act - assessee is adding back the provision and claiming only the actual amount - Industrial Dispute Act permits this sort of benefit for the employees and assessee has been making matching contribution, allowability of this amount does not attract the provisions of section 40A(9) - both AO and DRP are wrongly disallowed the amount Decided in favour of Assessee. Bonus, Leave Pay and Service Rewards Held that - AO did not allow the amount on the reason that third party evidences were not furnished it could not be understood as to what sort of third party evidences are required to allow the amounts the AO is directed to examine the vouchers furnished by the assessee and allow the amounts - With reference to service rewards also, it seems to be a gift in kind like fridge - This also requires to be examined by the AO the AO is directed to give opportunity to the assessee and allow the amounts after due examination. Provision of commission Held that - The commission liability has accrued to the assessee based on sales income booked and was in consistence with accounting Standard-I u/s 145 of IT Act 1961 wherein accrual concept is required to be followed the issue was not examined in detail by the AO the AO is directed to examine the sales made outside India on which provision was made and the amounts paid considering the adjustments made in the computation of income Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether Assessee's return filed along with TP report is to be considered or not?
2. Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not?
3. Whether operating cost adopted by TPO is correct or not?
4. Whether the comparables selected by the TPO are correct?
5. Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case?
6. Disallowance of various payments including gratuity, bonus, leave pay, service rewards, and Daughter's Marriage Benefit Fund.
7. Claim of deduction for provision of commission.
8. Double inclusion of interest income.

Detailed Analysis:

(A) Whether Assessee's return filed along with TP report is to be considered or not?
The Assessee filed a revised return reducing the loss by making a suo-moto transfer pricing adjustment. The Tribunal held that the revised return, which included the TP report and declared higher value of international transactions, is valid under Section 139(5) of the Act. The original return without the TP report was not valid, and the revised return should be considered by the AO.

(B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not?
The Tribunal referred to Rule 10B(e) and the Delhi ITAT decision in Haworth (India) Pvt. Ltd., concluding that the TPO/DRP should consider the suo-moto adjustments made by the Assessee. The net profit margin realized by the enterprise from international transactions must be computed considering these adjustments.

(C) Whether operating cost adopted by TPO is correct or not?
The TPO's adoption of a higher operating cost based on proportionate turnover was rejected. The Tribunal directed that the operating cost should be taken from the separate books of account maintained for the 100% EOU unit, which was Rs. 16,38,68,871, as opposed to the TPO's figure of Rs. 20.02 crores.

(D) Whether the comparables selected by the TPO are correct?
The Tribunal found deficiencies in the selection of comparables by the TPO, including differences in accounting periods and functional dissimilarities. The issue was remanded to the TPO/AO for fresh consideration, ensuring proper comparables are selected and objections from the Assessee are taken into account.

(E) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case?
The Tribunal clarified that the threshold limit should be compared with the actual transaction value, not the revised transaction value after suo-moto adjustments. The contention that the suo-moto adjusted value should be the base for the threshold limit was rejected.

Disallowance of Various Payments:
1. Gratuity: The AO disallowed Rs. 27,64,234, but erroneously added Rs. 32,87,949. The Tribunal directed the AO to verify the payment and allow the correct amount.
2. Bonus, Leave Pay, Service Rewards: The Tribunal directed the AO to examine the vouchers and allow the amounts, noting that the AO's requirement for third-party evidence was unnecessary.
3. Daughter's Marriage Benefit Fund: Following the reasoning in the previous year, the Tribunal directed the AO to allow the amount.

Claim of Deduction for Provision of Commission:
The Tribunal directed the AO to verify the provision made for commission and allow it based on the factual position, considering the sales made outside India.

Double Inclusion of Interest Income:
The Tribunal directed the AO to examine and correct the double inclusion of Rs. 5,37,000 in the computation of total income.

Conclusion:
The appeals were partly allowed for statistical purposes, with directions for the AO to re-examine several issues based on the Tribunal's findings and the Assessee's submissions. The Tribunal emphasized the need for the Assessee to present data concisely to facilitate the AO's examination.