2015 (3) TMI 311 - AT - Income Tax

Transfer pricing adjustment - adjustment of ₹ 61,958/- with respect of the international transaction of import of raw materials from the associated enterprise - Held that - A working of the comparability analysis was furnished at the time of the hearing. The Ld. Representative submitted that the detailed working related to the transactions where common products were being imported from associated enterprises, which were also being purchased from third parties in India. The Ld. Representative pointed out that as per the said working there was no necessity of making any adjustment to the stated value of the imports from the associated enterprises. Nevertheless, we find that the aforesaid working, which is claimed to have been prepared as per the decision of the Tribunal in assessment year 2007-08 requires to be verified by the Assessing Officer. We therefore direct the Assessing Officer to verify the aforesaid working - Decided in favour of assessee for statistical purposes. International transaction on account of drop shipment commission - Held that - Ostensibly, in terms of sub-clause (i), the price charged or paid in a comparable uncontrolled transaction is to be identified for the purpose of determining the arm s length price of the international transaction being tested. It is starkly evident that in the present case, the comparable transaction picked-up by the TPO, namely, agreement between assessee and Henkel USA is a transaction between two related/associated enterprises and therefore it is a controlled transaction and not a uncontrolled transaction . Such a transaction undertaken between two controlled entities, in our view cannot be considered as a comparable uncontrolled transaction , as envisaged in clause (a) of sub-rule (1) of rule 10B of the Rules. Hence, on this count itself, the adjustment made by the TPO by considering the agreement between Henkel USA and assessee as an arm's length price for the impugned international transaction has to fail. Therefore, the addition made by the TPO on this count hereby directed to be deleted. - Decided in favour of assessee. Provision for onerous charges - Assessing Officer has denied the claim on the ground that it was a contingent liability - compensation for the unexpired lock-in-period - non deduction of tds - Held that - The said liability cannot be treated as contingent liability. The liability is an ascertained liability because it has arisen because of the assessee having opted to terminate the said lease-deed prematurely. It is also nobody s case that the said decision was not a business decision. Therefore, the liability having crystallized in view of the terms and conditions of the leasedeed, we find that its incurrence cannot be said to be contingent. Therefore, the stand of the Revenue to say that it is a contingent liability is not justified. TDS u/s 194-I - In an appreciation of the terms and conditions of the lease-deed which required the assessee to pay such sum, it can be seen that the said payment is for non-use of the property for the pre-contracted period. In other words, the payment at best can be seen to be for breach of a contractual obligation of taking premises on rent, but cannot be said to be for use of the property. Therefore, in our view, it would be inappropriate to characterize the sum of ₹ 12,50,700/- as a payment made for the use of property so as to fall within the meaning of expression rent u/s 194-I of the Act. Therefore, in our view, the provisions of section 40(a)(ia) of the Act are not attracted in the present case, as tax u/s 194-I of the Act was not required to be deducted. - Decided in favour of assessee.

Issues Involved:

1. Addition of Rs. 3,24,71,763/- based on DRP directions.
2. Transfer Pricing adjustments for international transactions.
3. Rejection of aggregation approach for benchmarking.
4. Application of Comparable Uncontrolled Price (CUP) method.
5. Denial of working capital adjustment.
6. Adjustment for commission income from drop shipment services.
7. Non-adoption of prescribed methods for arm's length analysis.
8. Non-provision of +/- 5 percent variation.
9. Disallowance of Provision for Onerous Charges.
10. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Addition of Rs. 3,24,71,763/-:
The learned AO, following the directions of the DRP, made an addition of Rs. 3,24,71,763/- to the appellant's income for the assessment year 2008-09. This addition primarily stems from transfer pricing adjustments and other disallowances.

2. Transfer Pricing Adjustments:
The core dispute revolves around the determination of the arm's length price for international transactions. The appellant had undertaken transactions involving import of raw materials, packing materials, finished goods, drop shipment commission receipts, and export of finished goods. The TPO proposed an adjustment of Rs. 3,12,21,063/- to the stated value of these transactions, which was upheld by the AO.

3. Rejection of Aggregation Approach:
The appellant aggregated transactions into Manufacturing and Trading segments for benchmarking using the Transactional Net Margin Method (TNMM). However, the TPO rejected this approach and instead applied the CUP method. The Tribunal upheld the TPO's approach, citing the availability of internal comparable uncontrolled transactions.

4. Application of CUP Method:
The TPO adopted the CUP method for benchmarking import of raw materials, export of finished goods, and drop shipment services, resulting in adjustments of Rs. 61,958/-, Rs. 3,08,72,664/-, and Rs. 2,86,441/- respectively. The Tribunal found the CUP method appropriate due to the existence of internal comparables.

5. Denial of Working Capital Adjustment:
The appellant's plea for working capital adjustment in respect of export of finished goods was denied. The Tribunal directed the AO to reconsider this aspect in light of the Tribunal's decision for the preceding assessment year 2007-08.

6. Adjustment for Commission Income from Drop Shipment Services:
The TPO made an adjustment of Rs. 2,86,441/- to the commission income from drop shipment services, comparing agreements with Henkel USA and Henkel Malaysia. The Tribunal directed deletion of this adjustment, noting that the TPO used a controlled transaction (Henkel USA agreement) as a comparable, which is contrary to the rules.

7. Non-Adoption of Prescribed Methods:
The appellant argued that the AO/TPO/DRP did not adopt any of the methods prescribed under section 92C for conducting arm's length analysis for the drop shipment services. The Tribunal directed the AO to re-work the arm's length price determination in line with the Tribunal's previous decision.

8. Non-Provision of +/- 5 Percent Variation:
The appellant contended that the AO/TPO/DRP erred in making transfer pricing adjustments without giving the option of +/- 5 percent variation as available under the Proviso to section 92C(2). This issue was not specifically addressed in the Tribunal's order.

9. Disallowance of Provision for Onerous Charges:
The AO disallowed Rs. 12,50,700/- claimed as Provision for Onerous Charges, treating it as a contingent liability. The Tribunal found that the liability was ascertained due to the premature termination of a lease agreement and not contingent. Additionally, the Tribunal held that the payment was not subject to TDS under section 194-I as it was not for the use of the property but for terminating the lease.

10. Initiation of Penalty under Section 271(1)(c):
The appellant argued that the AO erred in initiating penalty proceedings under section 271(1)(c) as full disclosures were made. This issue was not specifically addressed in the Tribunal's order.

Conclusion:
The Tribunal directed the AO to re-examine the transfer pricing adjustments and the disallowance of Provision for Onerous Charges in light of the Tribunal's previous decisions. The appeal was partly allowed, and the AO was instructed to provide the appellant with a reasonable opportunity of being heard before passing a fresh order.

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