2015 (9) TMI 644 - AT - Income Tax

Transfer pricing adjustment - calculation of OP/TC of EIL - CIT(A) deleted the addition - Held that - We find that the major item of Other income is Interest income which rightly deserves exclusion from the operating profit. When we compare other figures from the Profit & Loss account of EIL and the Annexure-I, it comes to light that the figures of all the expenses tally. To put it simply, the assessee took all the expenses, including the non-operating expenses, in the calculation of operating profit of EIL. It is but natural that if the items of non-operating income are to be excluded from the computation of operating profit, then the items of non-operating expense should also be excluded. One-sided exercise has been done with the obvious reason to bring down the OP/TC of EIL at 6.98%. The net effect of the exercise carried out by the assessee in calculating OP/TC of EIL at 6.98% by taking the figure of operating income on one hand and total expenses (both operating and non-operating) on the other is patently misleading, inasmuch as the figure of profit so computed is neither operating profit nor net profit. It lies somewhere between the two as it has become excess of operating income over total expenses (both operating and non-operating). In our considered opinion, the view canvassed by the ld. CIT(A) in accepting the correctness of the assessee s calculation of OP/TC of EIL at 6.98% at its face value, cannot be sustained because of the apparent flaws as discussed above. Under these circumstances, we set aside the impugned order on this issue and remit the matter to the file of the AO/TPO for a correct de novo determination of the OP/TC of EIL. After doing this exercise, the TPO will compute ALP of the international transaction as per law. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Deletion of addition on account of transfer pricing adjustment

Analysis:
The appeal by the Revenue contested the deletion of an addition of Rs. 45,41,519/- concerning transfer pricing adjustment for the assessment year 2004-05. The dispute revolved around the calculation of the Operating Profit to Total Cost (OP/TC) margin of Engineers India Ltd. (EIL), a comparable company chosen by the assessee. The Transfer Pricing Officer (TPO) initially accepted the OP/TC margin of EIL at 37.41% based on the assessee's submission. However, the assessee later argued that the correct OP/TC margin of EIL should be 6.98%, leading to the deletion of the addition by the Commissioner of Income Tax (Appeals) [CIT(A)].

The core issue focused on the accurate calculation of the OP/TC of EIL for inclusion and averaging among comparable companies. The TPO's use of current year data and the subsequent rectification application by the assessee to correct the OP/TC margin of EIL were key points of contention. The CIT(A) accepted the assessee's argument, leading to the deletion of the addition. However, the Tribunal noted discrepancies in the calculation methodology used by the assessee, particularly in excluding non-operating expenses while considering operating income, resulting in a misleading OP/TC figure.

The Tribunal set aside the CIT(A)'s order and remitted the matter to the AO/TPO for a correct determination of the OP/TC of EIL. The TPO was directed to recompute the Arm's Length Price (ALP) of the international transaction in accordance with the law, ensuring the assessee's right to a fair hearing. Ultimately, the appeal was allowed for statistical purposes, emphasizing the need for a proper and accurate calculation of the OP/TC margin for transfer pricing adjustments.