2016 (12) TMI 1792 - AT - Income Tax

Transfer pricing adjustment - import of components as made by the lower authorities - HELD THAT - We find that Rule 10B(e)(iii) hereinabove is regarding TNMM method only providing for various adjustments on account of the contemporaneous factors materially affecting the net profits. The above co-ordinate bench thereafter concludes that such capacity under utilization adjustments have to be made only in the hands of comparable entities instead of that in case of tested party itself. We thus accept assessee s instant argument in principle and direct the TRO to proceed afresh as indicated hereinabove after affording adequate opportunity of hearing to the assessee. We thus direct the Transfer Pricing authority to confine the impugned adjustments to the extent of assessee s international transactions only in consequential proceedings. The assessee s first substantive ground is accordingly accepted for statistical purposes. Transfer pricing adjustment in respect of sale of cloth guiders to its associate enterprises - There is no dispute that it had sold cloth guiders no. KF 2020 and KF 2060 numbering 600 35 involving adjusted per unit price of 26180/- and 57849/- as against those numbering 30 3 sold to third parties involving adjusted per unit price of 26071/- 56762/-; respectively. It had used CUP method in benchmarking the above transactions. TPO proceeded to make the impugned adjustment after noticing the above difference in the sale price involving assessee s associate enterprises and third party customers. The DRP upholds the same as indicated in the instant ground. The assessee s next argument is that it has to provide warranties to local purchasers as calculated at the rate of 608/- which is not the case with respect to its associate enterprises. Learned counsel accordingly submits that the lower authorities ought to have included the above two factors for the purpose of making adjustments before arriving at the ALP adjustment in question. The said gap is to the tune of 1/20th in case of former variety of cloth guider and almost 1/10th in latter category (supra). The Revenue further is unable to dispute the fact that assessee has been providing warranty cost to its local purchasers which has further shrunk its profit margins in question. We thus prima facie agree with assessee s above two arguments in principle and leave it open for the ld. Transfer Pricing Officer to make appropriate adjustments as per law after affording adequate opportunity of hearing in consequential proceedings. The assessee s latter substantive ground is remitted back to the TRO accordingly. Both the learned representatives point out that assessee s third substantive ground seeking 5% tolerance margin in ALP determination is identical to that raised in preceding assessment year forming part of this order itself. We find that we have already held the same to be consequential in nature to be decided at the time of final computation.

Summary

Issues Involved:
1. Transfer pricing adjustment for the import of components.
2. Transfer pricing adjustment for commission income.
3. Benefit of ±5% tolerance margin in transfer pricing adjustments.
4. Capacity underutilization benefit in transfer pricing adjustment.
5. Transfer pricing adjustment for the sale of cloth guiders.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for the Import of Components (Assessment Year 2007-08):
The assessee challenged the correctness of a transfer pricing adjustment of ?23,542,136/- for the import of components. The Transfer Pricing Officer (TPO) had excluded two loss-making comparables and adopted PBIT/sales instead of PBDIT/sales for profit level indicator (PLI). The Dispute Resolution Panel (DRP) upheld the TPO’s action but directed the inclusion of four new comparables. The tribunal found that the TPO and DRP had not conducted a FAR analysis for the excluded comparables and directed the TPO to redo the exercise. Additionally, the tribunal directed the TPO to exclude depreciation for PLI computation, aligning with the tribunal’s decision in M/s. BA Continuum India Pvt. Ltd. vs. ACIT.

2. Transfer Pricing Adjustment for Commission Income (Assessment Year 2007-08):
The assessee contested a transfer pricing adjustment of ?6,52,435/- for commission income derived from German and Italian associate enterprises. The TPO and DRP had adopted a PLI of 12.13% based on a comparable uncontrolled transaction with a German non-associate enterprise. The tribunal upheld the adjustment, noting that the assessee could not dispute the comparability of the non-associate enterprise under the CUP method.

3. Benefit of ±5% Tolerance Margin in Transfer Pricing Adjustments (Assessment Year 2007-08):
The assessee sought a ±5% tolerance margin benefit in transfer pricing adjustments. The tribunal noted that this issue is essentially computational and should be considered during final computation, as the substantive issues had been remitted back to the TPO.

4. Capacity Underutilization Benefit in Transfer Pricing Adjustment (Assessment Year 2008-09):
The assessee argued for a capacity underutilization adjustment for the import of components, claiming it had utilized only 35% of its installed capacity. The TPO and DRP denied this adjustment, stating such adjustments are not provided in the Act or Rules. The tribunal, referencing Rule 10B(1)(e)(3) and a coordinate bench decision in DCIT vs. EDAG Engineers & Design India Pvt. Ltd., directed the TPO to make the adjustment for capacity underutilization in the hands of comparable entities.

5. Transfer Pricing Adjustment for the Sale of Cloth Guiders (Assessment Year 2008-09):
The assessee contested a transfer pricing adjustment for the sale of cloth guiders to associate enterprises, arguing that the difference in sale prices was due to volume differences and warranty costs provided to local purchasers. The tribunal agreed with the assessee’s arguments in principle and remitted the issue back to the TPO for appropriate adjustments, considering the volume of transactions and warranty costs.

Conclusion:
The tribunal remitted several issues back to the TPO for fresh adjudication, emphasizing the need for proper analysis and adjustments as per legal standards. The appeals were partly accepted for statistical purposes, with directions for detailed re-evaluation and consideration of specific arguments raised by the assessee.