2012 (3) TMI 686 - AT - Income Tax

Summary

Issues Involved:

1. Adjustment in the price of international transaction.
2. Use of single year data vs. multiple year data.
3. Exclusion of certain comparables.
4. Risk adjustment in transfer pricing.
5. Benefit of 5% arm's length range.
6. Proportionate adjustment of transfer pricing.
7. Recognition of excess revenue under BSNL contract.
8. Disallowance of provision for warranty.
9. Deduction for prior period expenses.
10. Initiation of penalty proceedings u/s 271(1)(c).

Summary:

1. Adjustment in the price of international transaction:
The assessee challenged the adjustment made in the price of international transactions with its associate enterprises, resulting in an addition of Rs. 49,37,51,430 to the total income. The adjustment was based on the recommendation of the Transfer Pricing Officer (TPO) u/s 92CA(3) of the Income-tax Act, 1961. The TPO accepted the Transactional Net Margin Method (TNMM) but rejected three out of seven comparables identified by the assessee, leading to an arithmetic mean of 6.96% for the comparables.

2. Use of single year data vs. multiple year data:
The assessee argued for the use of multiple year data, but the TPO and Dispute Resolution Panel (DRP) used single year data for Financial Year 2005-06, as mandated by Rule 10B(4). The Tribunal upheld this approach, stating that the current year data must be used unless exceptional circumstances justify otherwise.

3. Exclusion of certain comparables:
The TPO excluded Arraycom India Ltd. due to persistent losses and reduced operations. The Tribunal upheld this exclusion, agreeing that persistent losses and reduced operations made Arraycom uncomparable.

4. Risk adjustment in transfer pricing:
The assessee claimed that it bore less risk compared to comparables and sought risk adjustment. However, the Tribunal found no merit in this claim as the assessee did not raise this issue before the TPO and failed to provide sufficient evidence.

5. Benefit of 5% arm's length range:
The assessee sought a standard deduction of 5% in the Profit Level Indicator (PLI) determined by the TPO. The Tribunal rejected this claim, following the precedent that the tolerance band is not a standard deduction but a range within which no adjustment is required if the transfer price is within ±5% of the ALP.

6. Proportionate adjustment of transfer pricing:
The assessee argued that the adjustment should be restricted to the value of the impugned international transaction with the A.E. The Tribunal remitted this issue to the Assessing Officer for re-adjudication, directing to quantify the arm's length price accurately.

7. Recognition of excess revenue under BSNL contract:
The assessee contested the recognition of excess revenue of Rs. 55,46,10,230 under the BSNL contract. The Tribunal found that the assessee failed to provide sufficient details and supporting documents. This issue was remitted to the Assessing Officer for re-adjudication with directions to the assessee to provide necessary details.

8. Disallowance of provision for warranty:
The assessee claimed a provision for warranty of Rs. 14,42,47,994, which was disallowed by the Assessing Officer due to lack of supporting evidence. The Tribunal remitted this issue for re-adjudication, directing the assessee to justify the claim with systematic data.

9. Deduction for prior period expenses:
The assessee claimed deductions for expenses amounting to Rs. 12,493,042 and Rs. 130,932,301, which were not claimed in the return filed u/s 139(1) or revised return u/s 139(5). The Tribunal entertained these grounds and remitted the issues to the Assessing Officer for verification and re-adjudication.

10. Initiation of penalty proceedings u/s 271(1)(c):
The ground regarding initiation of penalty proceedings was deemed premature and was rejected by the Tribunal. The defence against the penalty would be entertained in separate penalty proceedings if commenced by the Assessing Officer.

Decision:
The appeal of the assessee was allowed for statistical purposes, with several issues remitted to the Assessing Officer for re-adjudication.