2016 (6) TMI 583 - AT - Income Tax

Transfer pricing adjustment - determination of ALP - bench marking technique - Held that - There is a strength in the contention of the learned Authorised Representative that in view of the complexity of the transactions between the assessee and its AEs as well as the third party transactions in which the assessee has to pay the selling commission to the AE, the assessee adopted entity level operating margin for the purpose of bench marking its international transactions. However, this method is not permitted as per the provisions and rules of the transfer pricing under Income Tax Act and I.T. Rules and therefore to that extent, we find that the learned CIT (Appeals) was justified in rejecting the methodology applied by the assessee as well as by the TPO. Once the CIT (Appeals) has rejected the entity level profit margin of the assessee for the purpose of bench marking the international transactions with ALP, the CIT (Appeals) was required to redo exercise of determination of ALP as per the provisions of transfer pricing. Instead of following the proper procedure stipulated under Chapter X of the I.T. Act as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take the AEs of the assessee as tested party and further recomputed their profit margin by excluding certain expenses which we find is not permitted under the provisions of transfer pricing. Not only changing the tested party from the assessee to its AE, the CIT (Appeals) has also selected a domestic company as a comparable to the AE of the assessee. Therefore the entire exercise of determining the ALP by the CIT (Appeals) is contrary to the provisions of transfer pricing under the I.T. Act. Hence in view of the facts and circumstances of the case, we set aside the impugned order of the authorities below and remit the issue to the record of the Assessing Officer / TPO for deciding the matter afresh by considering the segment-wise data of the assessee and then compare the same with the comparable companies in the light of various decisions relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in normal circumstances where there is no difficulty in selecting the comparable companies. Therefore we direct the TPO to apply the RPT filter at 15% instead of 25% and then consider the comparability of the companies. Since the assessee did not fully co- operate with the authorities below in the first round of the proceedings therefore we direct the assessee to co-operate in the proceedings before the A.O./TPO and furnish the relevant and requisite details in order determining the ALP. Needless to say that the Assessing Officer/TPO also consider the benefit of tolerance range of / - 5% as per the proviso to Section 92C(2) as well as working capital adjustment. Reduction of foreign currency expenses from the export turnover - Held that - We direct the Assessing Officer/TPO not to reduce the expenses from the export turnover for computation of deduction under Section 10A Foreign tax credit - Held that - In the outcome of the remand proceedings if any tax liability is determined by the Assessing Officer, then the tax credit in respect of the foreign tax paid by the assessee is also required to be considered. We accordingly direct the Assessing Officer to consider the appropriate credit for foreign tax paid. Computation of deduction under Section 10A - Held that - The Hon ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others ( 2011 (8) TMI 782 - KARNATAKA HIGH COURT ) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator.

Issues Involved:

1. Reference to Transfer Pricing Officer (TPO) under section 92CA(1)
2. Determination of arm's length price (ALP)
3. Rejection of Transfer Pricing (TP) analysis
4. Adoption of Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM)
5. Adjustment for differences between appellant and comparable companies
6. Restriction of TP adjustment to Associated Enterprise (AE) transactions
7. Benefit of +/- 5% range under section 92C(2)
8. Reduction in deduction under section 10A
9. Disallowance under section 40(a)(i)
10. Foreign tax credit
11. Interest under sections 234B and 234D
12. Penalty under section 271(1)(c)

Detailed Analysis:

1. Reference to Transfer Pricing Officer (TPO) under section 92CA(1):
The assessee contested the reference made by the Assessing Officer (AO) to the TPO without specifying the relevant clause under section 92C(3). The Tribunal found that the AO's reference was necessary and expedient, and the CIT(A) confirmed the AO's action.

2. Determination of arm's length price (ALP):
The TPO rejected the assessee's TP study and conducted a fresh analysis, selecting 17 comparables and determining a mean margin of 19.63% (18.87% after working capital adjustment). The Tribunal noted that the CIT(A) adopted a new method without giving a show-cause notice to the assessee and selected a domestic company as a comparable to the AE, which was not permissible. The Tribunal remitted the issue to the AO/TPO for fresh consideration, directing them to use segment-wise data and apply a 15% RPT filter.

3. Rejection of Transfer Pricing (TP) analysis:
The CIT(A) rejected the TP analysis of both the assessee and the TPO, adopting CPM instead of TNMM and considering the AE as the tested party. The Tribunal found this approach contrary to transfer pricing provisions and remitted the issue for fresh determination.

4. Adoption of Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM):
The CIT(A) adopted CUP for evaluating the selling commission paid to AE and CPM for onsite services without proper justification. The Tribunal remitted the issue for fresh consideration, emphasizing the need for proper methodology and process.

5. Adjustment for differences between appellant and comparable companies:
The Tribunal directed the AO/TPO to make proper adjustments for enterprise-level and transactional-level differences and consider the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2).

6. Restriction of TP adjustment to Associated Enterprise (AE) transactions:
The Tribunal noted that the AO/TPO erred in not restricting the TP adjustment to AE transactions only and directed them to make appropriate adjustments.

7. Benefit of +/- 5% range under section 92C(2):
The Tribunal directed the AO/TPO to allow the benefit of the +/- 5% range mentioned in the proviso to section 92C(2).

8. Reduction in deduction under section 10A:
The CIT(A) directed the AO to reduce foreign currency expenses from both export turnover and total turnover while computing the deduction under section 10A. The Tribunal upheld this, following the jurisdictional High Court's decision in the assessee's own case.

9. Disallowance under section 40(a)(i):
The CIT(A) disallowed the commission payment to MphasiS Corporation under section 40(a)(i) for lack of tax deduction at source. The Tribunal remitted the issue for reconsideration in light of the Circular issued by the Central Board of Direct Taxes.

10. Foreign tax credit:
The CIT(A) concluded that the assessee failed to substantiate its claim for foreign tax credit. The Tribunal directed the AO to grant appropriate credit for foreign taxes in the outcome of remand proceedings.

11. Interest under sections 234B and 234D:
The Tribunal noted that interest under sections 234B and 234D is consequential in nature.

12. Penalty under section 271(1)(c):
The Tribunal found the issue of penalty under section 271(1)(c) premature to deal with and directed the AO to re-compute the penalty based on the enhanced total income.

Revenue’s Appeal:
The Revenue contested the CIT(A)'s direction to exclude telecommunication and foreign currency expenses from the total turnover for computing deduction under section 10A. The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's ruling in the case of Tata Elxsi Ltd.

Conclusion:
The assessee's appeal was allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal remitted several issues to the AO/TPO for fresh consideration and directed them to follow proper procedures and make necessary adjustments.

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