2015 (12) TMI 1838 - AT - Income Tax

TP Adjustment - selection of MAM - appropriate method of accounting - whether the Profit Split Method (PSM) is the most appropriate method when data is not available on the CUP method as most appropriate method - HELD THAT - We find there are decisions to denounce for PSM and the choice is between the CUP and TNMM as the best appropriate method in matters of indenting international transactions. One of the decisions cited above also supports the CUP as the most appropriate method. We are of the opinion in principle we agree with the Ld Counsel s argument that internal CUP is the most appropriate method in this kind of factual situation. Percentage of commission in ALP studies - correctness of 5% as the Arm s Length Price (ALP) in benchmarking the transactions with Associated Enterprise (AE) - HELD THAT - Rate of 1.35% ( in the case of Cisco Systems 2011 (9) TMI 477 - ITAT BANGALORE and 1.49% in the case of Hoganas India Private Limited vs. DCIT 2013 (9) TMI 369 - ITAT PUNE have to be rejected considering the rates approved in the case of Sumitomo Corporation (2.26%) 2013 (12) TMI 594 - ITAT DELHI and Bayer Material Science (5%) 2011 (12) TMI 393 - ITAT MUMBAI . In our opinion to remove the statistical error if any the average of these two comparables should be considered to arrive at the appropriate rate of ALP for benchmarking the impugned transactions. Accordingly 3.63% should be appropriate rate to be adopted by the AO for calculating the adjustments to be made. Thus we partly allow the relevant grounds of the assessee as the case may be. Accordingly AO is directed to adopt 3.63% as appropriate rate of ALP for benchmarking the impugned transactions. Addition u/s 40(a)(ia) - effecting TDS on the payments made which are actually the case of reimbursement of expenses - HELD THAT - Such expenditure by way of reimbursement of salaries to Genius company do not attract TDS provisions and therefore the provisions of section 40(a)(ia) need not be invoked. It is nobody s case that the payments in question are not in the reimbursement of the salary of the deputed personnel by the Genius. Considering the same we delete addition on this account and allow the Ground no.2 raised by the assessee. Addition @ 10% of the cost of consumables and expenses for want of bills - AO made addition out of operating and other expenses on ad-hoc basis - Revenue relied on the order of the AO / DRP and submitted that the onus is on the assessee to demonstrate the genuineness of the expenses when a claim is made u/s 37 - HELD THAT - We are of the opinion that the decision of the DRP and the AO on this issue is fair and reasonable and the same does not call for any interference. Accordingly these two grounds are dismissed.

Summary

Issues involved:
1. Transfer Pricing issue - Profit Split Method vs. Comparable Uncontrolled Price method
2. Rate of commission in Arm's Length Price studies
3. Treatment of TDS credits and interest under section 234A
4. Addition under section 40(a)(ia) for lack of TDS on reimbursement of expenses
5. Addition of expenses for want of bills

Transfer Pricing issue:
The appeals involved the Transfer Pricing issue for the assessment years 2006-07 and 2007-08. The main contention was the appropriateness of the Profit Split Method (PSM) compared to the Comparable Uncontrolled Price (CUP) method. The Tribunal considered the facts where the assessee, an indenting agent, received commission for services provided to an Associated Enterprise (AE). The Transfer Pricing Officer (TPO) initially applied PSM due to the absence of CUP data, resulting in a 10% profit allocation to the assessee. However, the Dispute Resolution Panel (DRP) disagreed with the TPO's approach and directed a 5% margin allocation based on the PSM. The Tribunal agreed with the assessee's argument that CUP was the most appropriate method for such transactions. Moreover, the Tribunal determined a 3.63% commission rate as the appropriate Arm's Length Price for benchmarking the transactions, partly allowing the assessee's appeal on this issue.

Rate of commission in Arm's Length Price studies:
The Tribunal analyzed the rate of commission for Arm's Length Price studies. It noted various comparable rates ranging from 1.35% to 5% in different cases. Considering these comparables, the Tribunal determined that an average rate of 3.63% should be adopted for calculating adjustments. Consequently, the Tribunal directed the Assessing Officer to use this rate for benchmarking the transactions, partially allowing the relevant grounds raised by the assessee.

Treatment of TDS credits and interest under section 234A:
Regarding the treatment of TDS credits and interest under section 234A, the Tribunal directed the Assessing Officer to promptly address the assessee's application under section 154 of the Act, emphasizing the need for expedited resolution.

Addition under section 40(a)(ia) for lack of TDS on reimbursement of expenses:
The Tribunal ruled that payments made as reimbursements for salaries of deputed personnel did not attract TDS provisions. Citing a relevant High Court judgment, the Tribunal held that such reimbursements did not require TDS deduction. Consequently, the Tribunal deleted the addition made under section 40(a)(ia) and allowed the grounds raised by the assessee on this issue.

Addition of expenses for want of bills:
The Tribunal considered additions made by the Assessing Officer for lack of bills related to expenses. Despite the assessee's inability to provide all bills, the Tribunal found the decision of the Dispute Resolution Panel and the Assessing Officer fair and reasonable. Consequently, the Tribunal dismissed the grounds raised by the assessee on this issue.

In conclusion, the Tribunal partly allowed both appeals of the assessee, addressing various Transfer Pricing issues, the rate of commission in Arm's Length Price studies, TDS credits, and additions related to expenses. The Tribunal provided detailed analyses and directions on each issue, ensuring a fair and comprehensive resolution.