2019 (12) TMI 1468 - AT - Income Tax

TP Adjustment - MAM selection - computation of the transfer pricing addition by taking all the direct and indirect costs incurred by the assessee - inclusion of two comparables - HELD THAT - On a conjoint reading of the relevant parts of above sub-clauses it is manifested that the RPM compares the transaction at gross profit level which means considering all the direct costs forming part of the Trading account only. Not only the gross profit margin of the comparables is taken for application to the sale price of the goods purchased from the AE but also the expenses incurred by the assessee in connection with the purchase of goods are then sought to be reduced. The mandate is for reducing only the expenses incurred by the assessee in connection with the purchase of goods and no other expenses. On a relative analysis it emerges that it is only the items of the Trading account of the comparables as well as the assessee which go into determining the ALP of the international transaction of purchase of goods from the AEs under the RPM. If under sub-clause (iii) we proceed to reduce the indirect costs also meaning thereby the costs debited to the Profit and loss account of the assessee the effect would be that we would be comparing the figure of comparables at gross level with the figure of the assessee at net level distorting the comparability. Sub-clause (iv) talks of even ironing out the differences in the accounting practices of the assessee and comparables. Its rationale is that even after considering all the costs debited to the Trading account of both the assesses and comparables if still there remains some difference due to following of different accounting practices then the effect of such difference should also be given to in the determination of the ALP. It may cover a situation in which a comparable may have either debited an item of indirect cost to the Trading account or some direct cost to the Profit and loss account effect of which is required to be given. There is no prescription what so ever for considering the indirect costs either of the assessee or the comparables in determining the ALP under the RPM. TPO in the calculation extracted above has rightly considered the gross profit margin of the comparables but stepped out of the method in considering the Operating cost of the assessee and has in fact included all the direct and indirect costs of the assessee. The method adopted by the TPO has become a hybrid of the RPM and the TNMM which has needlessly dragged down the ALP of the international transaction of purchase of goods. As against that he ought to have considered only the direct costs of the assessee so as to bring parity with the gross margin of the comparables under the RPM. Thus the impugned order cannot be sustained to this extent. We therefore set-aside the impugned order pro tanto and hold that only the direct costs incurred by the assessee should be considered. Inclusion of two companies in the final set of comparables namely Larsen and Toubro Ltd. and Siemens Ltd. - As gone through the segmental reporting of L T Ltd. from which it can be seen that no separate figures for trading segment are available. As the assessee is admittedly only in the trading the consideration of L T Ltd. s figures also including manufacturing and property development activities do not serve as a good comparable. We therefore order to remove L T Ltd. from the list of comparables. TPO has computed at page 11 of his order the Gross margin of trading activity only of Siemens Ltd. at 49.20%. We have gone through the Annual report of this company. It can be seen that the year ending of this company is 30-09-2012. As against that the assessee is maintaining its accounts on financial year ending basis. In CIT Vs. PTC Software 2016 (9) TMI 1282 - BOMBAY HIGH COURT has held that the companies with different financial year endings cannot be considered as comparable under Rule 10B. Without going into further analysis and following the precedent on this preliminary issue we order to delete this company from the list of comparables. Transfer pricing addition on the entity level figures of the assessee company rather than the international transactions - Hon ble jurisdictional High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT has held that the transfer pricing addition can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Similar view has been espoused by the Hon ble Delhi High Court in CIT VS. Keihin Panalfa Ltd. 2016 (5) TMI 203 - DELHI HIGH COURT . Respectfully following the precedents we hold that the transfer pricing addition should be restricted only to the international transactions.

Summary

Issues Involved:
1. Correctness of the method adopted for determining the Arm’s Length Price (ALP).
2. Inclusion of direct and indirect costs in the computation of ALP.
3. Inclusion of specific companies as comparables.
4. Transfer pricing addition on entity level figures versus international transactions.
5. Consequential charging of interest.

Detailed Analysis:

1. Correctness of the Method Adopted for Determining the ALP:
The assessee applied the Transactional Net Margin Method (TNMM) to demonstrate that the international transactions were at Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) replaced TNMM with the Resale Price Method (RPM) as the most appropriate method, given that the goods were resold without any value addition. The assessee did not challenge the correctness of using RPM.

2. Inclusion of Direct and Indirect Costs in the Computation of ALP:
The TPO calculated the ALP by considering the gross profit margin of four comparable companies at 32.81%, but included both direct and indirect costs of the assessee, leading to a transfer pricing adjustment of ?6,14,21,652/-. The Tribunal noted that under Rule 10B(1)(b), RPM requires considering only direct costs forming part of the Trading account. Including indirect costs distorts comparability, thus the TPO's method was incorrect. The Tribunal held that only direct costs should be considered in determining the ALP under RPM.

3. Inclusion of Specific Companies as Comparables:
The assessee disputed the inclusion of Larsen and Toubro Ltd. (L&T) and Siemens Ltd. as comparables:
- Larsen and Toubro Ltd. (L&T): The TPO included L&T as a comparable by taking the trading segment's revenue. However, the Tribunal found that L&T's figures included manufacturing and property development activities, making it an unsuitable comparable for the assessee, which is only engaged in trading. Thus, L&T was removed from the list of comparables.
- Siemens Ltd.: The TPO computed Siemens Ltd.'s gross margin based on a different financial year ending (30-09-2012) than the assessee (financial year ending basis). Following the precedent set by the Bombay High Court in CIT Vs. PTC Software, companies with different financial year endings cannot be considered as comparables. Therefore, Siemens Ltd. was also removed from the list of comparables.

4. Transfer Pricing Addition on Entity Level Figures versus International Transactions:
The assessee contended that the transfer pricing addition was made on the entity level figures rather than on the international transactions. The Tribunal agreed, citing judgments from various High Courts, including the Bombay High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. and the Delhi High Court in CIT VS. Keihin Panalfa Ltd., which held that transfer pricing additions should be restricted to international transactions only.

5. Consequential Charging of Interest:
Grounds regarding the charging of interest were deemed consequential and dependent on the outcome of the primary issues.

Conclusion:
The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for fresh determination of the ALP of the international transactions, considering only direct costs and excluding the disputed comparables. The appeal was allowed for statistical purposes.