2016 (5) TMI 1098 - AT - Income Tax

Transfer pricing adjustment - Held that - As during the course of transfer pricing proceedings, it was shown by the assessee that assessee demonstrated that taking OP/OI as its PLI, the arithmetic mean margin of the comparables was 8.71% which was less than the margin shown by the assessee at 12.63%. The TPO suggested changing the PLI as OP/TC and if the PLI is taken as OP/TC the arithmetic mean margin of the comparables was 9.96% which was less than the margin shown by the assessee at 13.70%. Thus, undisputedly, on facts, the margin of the assessee was within the permitted range of ALP. We find that adjustment made by the TPO was contrary to law, and therefore, same is directed to be deleted. Since we have deleted the adjustment on primary grounds, we are not deciding other grounds - Decided in favour of assessee. Increasing the books profits for the purpose of section 115JB by the amount of transfer pricing adjustment while computing the total income of the assessee under the normal provisions of the Act - Held that - Only those adjustments are permissible to the book profit as have been prescribed u/s 115JB. The adjustment/additions made under the transfer pricing regulations are governed by altogether different sets of provision as contained in Chapter X of the Act. There is no such provision under the law that permits the AO to make adjustment on account of transfer pricing addition to the amount of profit shown by the assessee in its profit and loss account, for the purpose of computing book profit u/s 115JB. The law in this regard is clear. Reference is made to the judgment of Hon ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT 2002 (5) TMI 5 - SUPREME Court . It is noted from the perusal of the assessment order that the AO has simply made addition by an amount of ₹ 1,30,72,762/- to the amount of net profit as per profit and loss account for the purpose of computation of income u/s 115JB without even mentioning that under what provisions this addition was being made. Such an approach is highly unfair and brings undue and avoidable hardship to the tax payers and we recommend that such a casual approach should be avoided by the revenue officers, as it may tarnish image of the income tax department, which may in turn discourage voluntarily compliance by the taxpayers. Thus, we delete the addition made by the AO - Decided in favour of assessee.

Summary

Issues:
Transfer pricing adjustment under section 92CA(3) of the Act; Rejection of comparable companies for benchmarking international transactions; Benefit of variation/reduction of 5% from the arithmetic mean for determining arm's length price; Appreciation of written submission by the Appellant; Increase in books profits for section 115JB by the amount of transfer pricing adjustment.

Transfer Pricing Adjustment:
The appeal was against the final assessment order proposing a transfer pricing adjustment of ?1,30,72,762 under section 92CA(3) of the Act for international transactions in the year ended 31 March, 2007. The issue centered on the rejection of comparable companies selected by the Appellant for benchmarking its transactions. The TPO and DRP rejected the comparables based on the difference in products manufactured, despite the Appellant's argument that functional comparability should be considered for the Transaction Net Margin Method. The Appellant highlighted that the same comparables were accepted in prior and subsequent years, showing no change in facts or business. The Tribunal found the TPO's rejection unjustified as the Appellant's margin was within the ALP range, directing the adjustment to be deleted.

Benefit of Variation/Reduction and Written Submission:
The Appellant contended that the AO erred in not granting the benefit of a 5% reduction from the arithmetic mean while determining the arm's length price, as provided in the proviso to section 92C(2) of the Act. The AO and DRP were criticized for not appreciating the written submission filed by the Appellant, which detailed the grounds for challenging the transfer pricing adjustment. The Tribunal noted the Appellant's compliance with ALP requirements and directed the adjustment's deletion based on primary grounds, thereby partly allowing the main grounds of the appeal.

Increase in Books Profits for Section 115JB:
The additional ground challenged the AO's action of increasing the books profits for section 115JB by the transfer pricing adjustment amount. The Tribunal admitted the ground, citing the Supreme Court's judgment in NTPC, and emphasized that section 115JB is a self-contained code with specific adjustments permissible. The Tribunal highlighted the lack of provision permitting such adjustments for computing book profit under section 115JB due to transfer pricing regulations. Consequently, the Tribunal deleted the addition made by the AO, allowing the additional ground filed by the Appellant.

Conclusion:
The Tribunal allowed the appeal, emphasizing the unjustified rejection of comparables for transfer pricing adjustment and the incorrect increase in books profits under section 115JB. The Tribunal's detailed analysis focused on the legal provisions, past practices, and compliance with transfer pricing regulations, ensuring a fair outcome for the Appellant.