2014 (11) TMI 546 - AT - Income Tax

Determination of ALP Transfer pricing addition - Comparability analysis - Purchase of components, tools accessories & spares; and Sale of compressors Held that - The taxpayer has mixed the RPM and the CUP and has concluded that the transactions are at Arm s Length Price - The RPM relies on the gross profit margins - Further, the gross profit margins of the international transactions are required to be compared with the gross profit margins earned by independent parties - the taxpayer has compared its gross profit margin with itself to arrive at the Arm s Length Price - There are no external independent comparables used by the taxpayer - The CUP calls for strict comparability of the product on which transactions happen between the related party and independent party, which has not been provided - The method thus, fails. Sale of AK Kits and components Held that - The taxpayer is into manufacture of hermetically sealed compressors - in its search the taxpayer has considered the broad segment viz., non-electrical machinery in respect of EOU Kits manufacturing segment - the taxpayer has used the data relating to earlier two years data in addition to the current year - The selection of keywords itself is not correct as the taxpayer is into manufacture of compressor and the wrong selection of keywords has resulted into inappropriate selection of comparables - Therefore, the study made under TNMM is rejected - as selection of comparables by TPO suffers from these basic def iciencies, this issue requires re-examination by TPO by selecting proper comparables and then determine the ALP thus, the matter is remitted back to the AO for fresh consideration. Adoption of operating cost on the basis of estimation Held that - Following the decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax 2014 (4) TMI 816 - ITAT HYDERABAD - 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 - there is no reason for rejecting the same and estimating the operating cost on the basis of the proportionate turnover - Assessee has incurred loss in these transactions, whereas there was profit in other activity, which constitute 95% of Assessee s turnover - Taking sales as basis and arriving at the OP cost does not result in correct appreciation of Assessee s transactions - since segmental working is available on the basis of separate books of account maintained for EOU unit, operating cost has to be taken at ₹ 18,84,61,988/- and the TPO/AO is directed to take operating cost as stated Decided in favour of Assessee. Payment made towards daughter s marriage benefit disallowed Held that - Following the decision in Tecumseh Products India (P.) Ltd. Versus Assistant Commissioner of Income-tax 2014 (7) TMI 639 - ITAT HYDERABAD - 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.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Determination of Arm's Length Price (ALP)
3. Disallowance of Daughter's Marriage Benefit Payment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The main issue in the appeal is the transfer pricing adjustment made by the Assessing Officer (AO) following the directions of the Disputes Resolution Panel (DRP). The assessee, engaged in manufacturing compressors and related components, entered into various international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) made adjustments to the sale of sub-assembly components to the AE, which the assessee contested.

2. Determination of Arm's Length Price (ALP):
A. Comparability Analysis:
The TPO analyzed the transactions under different methods:
- Purchase of Components and Sale of Compressors: The taxpayer used the Comparable Uncontrolled Price (CUP) method but the TPO rejected it due to differences in payment terms and landing costs.
- Purchase of Compressors for Trading: The taxpayer used CUP and Resale Price Method (RPM) but failed to provide external comparables, leading to rejection by the TPO.
- Sale of AK Kits and Components: The taxpayer used the Transactional Net Margin Method (TNMM) but the TPO found issues with the selection of comparables and rejected the study.

The tribunal noted that similar issues were considered in earlier years and directed the AO/TPO to re-examine the comparability and selection of comparables, following the orders in previous years.

B. Adopting Operating Cost on the Basis of Estimation:
The TPO adopted the operating cost based on the sales turnover ratio, ignoring the segmental reports prepared by the assessee. The tribunal referenced earlier decisions where it was held that the operating cost should be based on the separate books of accounts maintained for the Export Oriented Unit (EOU). The tribunal directed the AO/TPO to accept the operating cost as per the audited books and re-work the adjustments accordingly.

3. Disallowance of Daughter's Marriage Benefit Payment:
The AO disallowed the payment of INR 5,02,000 towards the Daughter's Marriage Benefit, but the tribunal referenced earlier decisions where such payments were allowed under section 37(1) of the Income Tax Act. The tribunal directed the AO to allow the amount, as it was made for the benefit of employees and was part of a settlement under the Industrial Disputes Act.

Conclusion:
The appeal was allowed for statistical purposes, with directions to the AO/TPO to re-examine the transfer pricing adjustments and operating costs based on the segmental reports and earlier tribunal decisions. The disallowance of the Daughter's Marriage Benefit payment was reversed, allowing the deduction under section 37(1).