2014 (2) TMI 1347 - AT - Income Tax

TPA - Computation of net operating margins for the purpose of comparability of its international transactions - determination of net operating profits and operating revenues for the purposes of computing PLI of the assessee company - Held that - No difference in approach between the assessee and the Revenue on the aspect of excluding any item of income or expenditure for the purposes of calculating PLI so long as such item of income/expenditure is not linked to the international transactions under review. Objection of the Revenue is quite misplaced inasmuch as the assessee had raised this plea before the TPO evidently inasmuch as the order of the TPO extracted above, is in response to such plea of the assessee. We are also satisfied that the no additional evidence within the meaning of rule 46A of the Rules has been accepted by the CIT(A) on this aspect inasmuch as the exclusion of income/expenditure canvassed by the assessee, are based on its financial statements, which are a part of record. Therefore, we find no justification for the Revenue to assail the directions of the CIT(A). Ostensibly, the aspect involves a factual appreciation of the material on record, and therefore, we hereby uphold the direction of the CIT(A) to the Assessing Officer to re-determine the PLI by excluding items of income/expenditure which are not linked to the international transactions in order to compute the PLI of the assessee. The Assessing Officer shall allow the assessee a reasonable opportunity to make submissions to support its stand and thereafter the Assessing Officer shall pass an order on this aspect in accordance with law. Thus, on this aspect, assessee succeeds for statistical purposes and the Revenue fails in its Grounds of Appeal. Disallowance of adjustment on account of difference in levels of risk assumed by the assessee vis- -vis comparable companies - Held that - Our attention was invited to the written submissions wherein assessee had raised the issue of working capital adjustment and also wherein the issue of allowing risk adjustment wa1s raised. The assessee pointed out that aforesaid two aspects have not been adjudicated by the CIT(A) and that they have a bearing on the determination on the final tax liability. The learned counsel also furnished a copy of the order of the TPO u/s 92CA(3) of the Act for the subsequent assessment year of 2006-07 wherein the plea of the assessee for allowing of adjustment on account of working capital differences has been accepted. It was therefore contended that omission to deal with such Grounds of Appeal by the CIT(A) is unjustified. Factually speaking, the points raised by the learned counsel for the assessee have not been controverted by the learned Departmental Representative appearing for the Revenue. In background of the aforesaid factual matrix, it is evident that the grievance raised by the assessee in terms of the Grounds of Appeal Nos. 9 and 10 have not been adjudicated by the CIT(A) and, therefore we deem it fit and proper to restore the same back to the file of the CIT(A) for adjudication afresh

Summary

Issues Involved:
1. Transfer pricing adjustment of Rs. 2,73,98,848/-
2. Non-acceptance of data provided in the transfer pricing study report
3. Non-applicability of transfer pricing provisions to Export Oriented Unit (EOU) operations
4. Use of gross margins for comparability
5. Rejection of certain comparable companies
6. Non-verification of the computation of operating margins
7. Exclusion of extraordinary expenses for TNMM analysis
8. Losses not on account of the transfer price
9. Adjustment to margins of comparable companies for working capital differences
10. Adjustment to margins of comparable companies for risk profiles
11. Adjustment to margins of comparable companies for capacity utilization
12. Computation of benefit of variation of +/- 5 percent under section 92C(2)
13. Penalty proceedings under section 271(1)(c)
14. Revenue's appeal on exclusion of certain items of income and expenses for determination of PLI

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of Rs. 2,73,98,848/- made by the AO and TPO to the international transactions. The Tribunal noted that this issue was general in nature and did not require specific adjudication, thus dismissing it.

2. Non-Acceptance of Data in Transfer Pricing Study Report:
The assessee contended that the data in its transfer pricing study report was not accepted. This issue was also dismissed as it was not pressed during the hearing.

3. Non-Applicability of Transfer Pricing Provisions to EOU Operations:
The assessee argued that transfer pricing provisions should not apply to its EOU operations, which were entitled to a tax holiday under section 10B. This issue was not pressed and hence dismissed.

4. Use of Gross Margins for Comparability:
The assessee's plea to use gross margins instead of net margins for benchmarking international transactions was dismissed as it was not pressed during the hearing.

5. Rejection of Certain Comparable Companies:
The assessee's challenge against the rejection of certain comparable companies by the TPO was dismissed as it was not pressed.

6. Non-Verification of Computation of Operating Margins:
The Tribunal addressed the issue of non-verification of the computation of operating margins for TNMM analysis. The Tribunal noted that the CIT(A) had directed the AO to consider items of income and expenses not directly linked to the business for determining the PLI. The Tribunal upheld this direction, noting that the assessee's financial statements were part of the record and no additional evidence was accepted in violation of Rule 46A.

7. Exclusion of Extraordinary Expenses for TNMM Analysis:
The assessee's claim for excluding extraordinary/non-recurring expenses for TNMM analysis was dismissed as it was not pressed.

8. Losses Not on Account of Transfer Price:
The assessee's argument that its losses were due to under-utilization of capacity and not transfer pricing was dismissed as it was not pressed.

9. Adjustment for Working Capital Differences:
The Tribunal noted that the CIT(A) had not adjudicated the assessee's plea for adjustments considering differences in working capital levels. The Tribunal remanded this issue back to the CIT(A) for fresh adjudication, noting that the assessee had raised this plea and it had a bearing on the final tax liability.

10. Adjustment for Risk Profiles:
Similar to the working capital adjustment, the Tribunal noted that the CIT(A) had not adjudicated the plea for adjustments based on differences in risk profiles. This issue was also remanded back to the CIT(A) for fresh adjudication.

11. Adjustment for Capacity Utilization:
The issue of adjustment for capacity utilization differences was dismissed as it was not pressed during the hearing.

12. Computation of Benefit of Variation of +/- 5 Percent:
The assessee's plea regarding the computation of the arm's length price with a 5 percent variation was dismissed as it was not pressed.

13. Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was dismissed as being premature.

14. Revenue's Appeal on Exclusion of Certain Items for PLI Determination:
The Revenue's appeal contended that the CIT(A) erred in directing the AO to exclude certain items of income and expenses for PLI determination without confronting the TPO. The Tribunal found that the CIT(A)'s directions were justified and upheld them, noting that the exclusion of non-operating income and expenses was based on the assessee's financial statements, which were part of the record.

Conclusion:
The Tribunal partly allowed the assessee's appeal, specifically on the issues of adjustments for working capital and risk profiles, and dismissed the Revenue's appeal. The matter was remanded to the CIT(A) for fresh adjudication on the specified issues.