2016 (8) TMI 1431 - AT - Income Tax

TP Adjustment - comparables selection - HELD THAT - Accounting year of the assessee and comparables are different. The TPO at liberty to recast the financial for the period involved in the assessee s case. Accordingly, we direct the TPO to recast the financial for the full period of 12 months covering the previous year 2006-07 relevant to the assessment year 2007-08 and thereafter compare with the assessee s case so as to correct ALP. This ground is remitted to the file of TPO for fresh consideration. Segmented data in the case of Ador Multi products and Ajanta India. Admittedly, there is segmented data is available in these cases, as such only segmental information which reflects the comparable companies business function related margins should be adopted. Accordingly we remit this issue to the file of TPO to consider the segmented data of these two companies to determine the ALP in this case. This issue is remitted to the file of TPO for fresh consideration. Granting of 5% benefit provided in proviso to section 92C(2) of the Act to the assessee while determining the ALP - HELD THAT - An assessee shall not be entitled to exercise its option as referred to in the proviso to sub-section (2) if the variation between the arithmetical mean and the price at which such transaction has actually been undertaken exceeds five per cent. of the arith metical mean. In view of the retrospective operation of the aforesaid provision, the benefit of five per cent as a standard deduction cannot be allowed. In other words, if the variation of arithmetic mean is within the range of 5%, then the assessee is entitled for benefit of 5% under the proviso to Sec.92C(2) - we direct the TPO to allow 5% it, it is within the range of 5%. Ordered accordingly. Non providing any adjustment to arm s length margin of Comparable Companies on account of differences in Research & Development and Marketing activities - HELD THAT - The assessee sales only to AE and only job work, no work is involved. Hence by placing reliance with the order of Hyderabad Bench in the case of DCIT Vs. Hellosoft India Pvt. Ltd. 2013 (10) TMI 747 - ITAT HYDERABAD we direct the AO to grant risk adjustment of 1% towards Research and Development. Appeal of assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Upward Transfer Pricing (TP) adjustment to international transaction of export of foot care products.
2. Consideration of Amar Remedies Limited as a comparable company.
3. Adoption of segmental margins of Ador Multiproducts Limited and Ajanta India Limited.
4. Benefit of range of ±5% as provided in proviso to Section 92C(2) of the Act.
5. Adjustments to arm’s length margin of Comparable Companies on account of differences in Research & Development and Marketing activities.
6. Set off of carried forward losses before computing the tax payable.

Issue-wise Detailed Analysis:

1. Upward Transfer Pricing (TP) Adjustment:
The appellant contested the upward TP adjustment made by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP) regarding the export of foot care products to the associated enterprise (AE). The appellant argued that the TPO and DRP failed to consider the contentions, arguments, and evidentiary data presented during the proceedings. The Tribunal noted that the TPO had determined the Profit Level Indicator (PLI) of the assessee at -1.68% on cost and computed the average OP margin of comparables at 5.64%, leading to an adjustment. The Tribunal directed the TPO to reconsider the financials for the full period of 12 months to ensure a correct Arm’s Length Price (ALP) determination.

2. Consideration of Amar Remedies Limited as a Comparable:
The appellant argued that Amar Remedies Limited should not be considered as a comparable due to its different financial year-end. The Tribunal acknowledged this discrepancy and directed the TPO to recast the financials for the full period of 12 months covering the previous year 2006-07 relevant to the assessment year 2007-08 for a proper comparison.

3. Adoption of Segmental Margins of Ador Multiproducts Limited and Ajanta India Limited:
The appellant contended that the DRP/TPO should have adopted the segmental margins of Ador Multiproducts Limited and Ajanta India Limited instead of enterprise-level data. The Tribunal agreed with the appellant and remitted the issue to the TPO to consider the segmented data of these companies to determine the ALP accurately.

4. Benefit of Range of ±5% as Provided in Proviso to Section 92C(2) of the Act:
The appellant argued for the benefit of the ±5% range while determining the ALP. The Tribunal found merit in the appellant’s argument, referencing the retrospective amendment to Section 92C of the Act by the Finance Act, 2012, which clarifies that the benefit of ±5% is applicable if the variation between the arithmetical mean and the transaction price is within the range. The Tribunal directed the TPO to allow this benefit if applicable.

5. Adjustments to Arm’s Length Margin of Comparable Companies on Account of Differences in Research & Development and Marketing Activities:
The appellant argued that adjustments should be made to the arm’s length margin of comparable companies due to differences in Research & Development and Marketing activities. The Tribunal, referencing the order of the Hyderabad Bench in the case of DCIT Vs. Hellosoft India Pvt. Ltd., directed the Assessing Officer (AO) to grant a risk adjustment of 1% towards Research and Development.

6. Set Off of Carried Forward Losses Before Computing the Tax Payable:
The appellant contended that the Assistant Commissioner of Income Tax (ACIT) erred in not setting off the carried forward losses of ?4,55,10,981/- before computing the tax payable, despite specific directions from the DRP. The Tribunal did not provide a detailed analysis of this issue in the judgment.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes. The Tribunal directed the TPO to reconsider the financials for a full 12-month period for proper ALP determination, adopt segmental margins of comparable companies, and allow the benefit of the ±5% range if applicable. Additionally, the AO was directed to grant a 1% risk adjustment towards Research and Development. The issue of setting off carried forward losses was not explicitly resolved in the judgment.