2017 (4) TMI 1402 - AT - Income Tax

Computing the operating margin of the company - Not adjusting for extraordinary expenses/of nonrecurring expenses made by the assessee-company to operating cost like high manufacturing cost, high personnel cost, execution of low margin deals and high import content cost - Under-utilisation of the capacity - TPA - ALP determination - Held that - Law is quite settled to the extent that is quite settled to the extent that Once there is unutilized capacity or men power, such under-utilization impacts margin and therefore, the adjustment should be made while computing the ALP. But the onus lies on the assessee to establish there is under-utilization of the capacity and under-utilization is more than average under-utilization in the industry. If the under-utilization is more than average under-utilization of the industry then necessary adjustment is required to be made to the margin of computing ALP. But in the present case, the assessee-company failed to demonstrate under-utilisation of the capacity in assessee s own case and also not falling below average rate of under-utilization in the industry. In the circumstances, we remand the matter back to the file of the AO/TPO to adjudicate this issue in accordance with law after due opportunity to the assessee company. Direction of the DRP directing income from administrative services as part of operating revenue - Held that - To examine the correctness of the findings of the TPO, we examined the Annual Report and it is noticed by us from Schedule 13 to the P&L Account that the above amount has been shown as Administrative expenses recovered which clearly indicates that the administrative expenses recovered are nothing but the reimbursement of the expenses incurred by the assessee for the above company and therefore, if such income is excluded from the operating revenue, corresponding expenses have to be excluded from the operating cost. We are in agreement with the submission of the assessee that the administrative expenses recovered to be considered as operating revenue, considering the fact that the TPO has not reduced corresponding expenses from the operating cost. The Assessing Officer is directed accordingly.

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Transfer Pricing Documentation
3. Use of Current Data for Arm's Length Price (ALP) Calculation
4. Adjustment for Extraordinary and Non-Recurring Expenses
5. Rejection of Comparable Companies
6. Denial of Segmental Information
7. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation
8. Short Tax Credit
9. Levy of Interest under Sections 234B, 234C, and 234D
10. Initiation of Penalty Proceedings under Section 271(1)(c)
11. Inclusion of Income from Administrative Services as Operating Revenue

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the addition of ?33,520,573 to the total income on account of adjustment in the arm's length price of international transactions with associated enterprises (AEs). The Transfer Pricing Officer (TPO) had accepted the Transactional Net Margin Method (TNMM) but rejected the assessee's Transfer Pricing (TP) study report, applying filters that led to a higher adjustment.

2. Rejection of Transfer Pricing Documentation:
The TPO and Dispute Resolution Panel (DRP) rejected the TP documentation maintained by the assessee, contending that the data used in the computation of the arm's length price was not reliable or correct.

3. Use of Current Data for ALP Calculation:
The TPO determined the arm's length margin using only the Financial Year (FY) 2009-10 data, disregarding the use of the latest available data at the time of complying with TP documentation requirements.

4. Adjustment for Extraordinary and Non-Recurring Expenses:
The assessee argued that extraordinary expenses such as high manufacturing costs, high personnel costs, and high import content should be excluded while computing the operating margins. The tribunal noted that adjustments should be made for under-utilization of capacity if it exceeds the industry average. However, the assessee failed to demonstrate this, leading to the remand of the matter back to the TPO for fresh adjudication.

5. Rejection of Comparable Companies:
The TPO rejected certain comparable companies proposed by the assessee, which was upheld by the DRP. The tribunal remanded the matter for fresh adjudication.

6. Denial of Segmental Information:
The TPO did not consider segmental information provided by the assessee and computed the company-wide operating margin. The tribunal remanded this issue back to the TPO for fresh adjudication.

7. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation:
The assessee's appeal regarding the denial of set-off of brought forward business loss and unabsorbed depreciation was not aggrieved by the DRP's direction to the AO/TPO to verify these claims. Hence, the appeal on this ground was dismissed.

8. Short Tax Credit:
The assessee claimed a short tax credit of ?28,781. The tribunal directed the AO/TPO to verify and rectify this issue.

9. Levy of Interest under Sections 234B, 234C, and 234D:
The assessee contested the levy of interest under sections 234B, 234C, and 234D of the Act. The tribunal did not provide specific directions on this issue.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee objected to the initiation of penalty proceedings under section 271(1)(c). The tribunal did not provide specific directions on this issue.

11. Inclusion of Income from Administrative Services as Operating Revenue:
The revenue appealed against the DRP's direction to treat income from administrative services as part of operating revenue. The DRP found that administrative expenses recovered should be considered operating revenue if corresponding expenses are not excluded from operating costs. The tribunal upheld the DRP's finding, dismissing the revenue's appeal.

Conclusion:
The tribunal remanded several issues back to the TPO for fresh adjudication, including the adjustment for extraordinary expenses, rejection of comparable companies, and the use of segmental information. The tribunal upheld the DRP's direction regarding the inclusion of income from administrative services as operating revenue and dismissed the revenue's appeal on this ground. The tribunal directed the AO/TPO to verify and rectify the short tax credit claimed by the assessee. The appeal regarding set-off of brought forward business loss and unabsorbed depreciation was dismissed as the assessee was not aggrieved by the DRP's directions.

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