2012 (7) TMI 1172 - AT - Income Tax

Summary

Issues Involved:

1. Rejection of Comparability Analysis by the TPO.
2. Deletion of ALP Adjustment by CIT(A).
3. Inclusion of Controlled Transactions in Comparability Analysis.
4. Transfer Pricing Adjustment on Reimbursement of Expenses.
5. Internal Comparable Transactions for ALP Determination.

Issue-wise Detailed Analysis:

1. Rejection of Comparability Analysis by the TPO:

The TPO rejected the external comparables provided by the assessee on the grounds that they were functionally different from the assessee. The CIT(A), however, found that the TPO had committed factual errors by rejecting some companies as 'persistent loss-making companies' and not considering the use of segmental data by the appellant. The CIT(A) concluded that the TPO's rejection was not proper, and most of the companies selected by the assessee could be taken as comparables for the purposes of transfer pricing analysis.

2. Deletion of ALP Adjustment by CIT(A):

The CIT(A) deleted the ALP adjustment of Rs. 8,42,54,187 made by the AO, holding that the TPO erred in selecting ICBC as a valid comparable. The CIT(A) noted that ICBC was functionally dissimilar and had significant related party transactions, which made it inappropriate for benchmarking. The CIT(A) found that the assessee's transactions with its AEs were at arm's length based on external comparables.

3. Inclusion of Controlled Transactions in Comparability Analysis:

The TPO included the transactions of ICBC, a wholly-owned subsidiary of the assessee, with JTS Contracting Co., an AE, as a comparable. The CIT(A) rejected this inclusion, stating that the transactions between ICBC and JTS were related party transactions and could not be considered at arm's length. The Tribunal upheld the CIT(A)'s view that controlled transactions cannot be used for benchmarking under the TNMM.

4. Transfer Pricing Adjustment on Reimbursement of Expenses:

The assessee challenged the addition of Rs. 85,18,813 made by the TPO on account of a 5% mark-up on reimbursement of expenses received from its AEs. The CIT(A) upheld the addition, reasoning that the assessee could not waive the mark-up recoveries at will. The Tribunal agreed with the CIT(A) but directed the AO to recompute the ALP adjustment based on the agreed mark-up costs which were not recovered by the assessee.

5. Internal Comparable Transactions for ALP Determination:

The Tribunal addressed whether internal comparable transactions with an AE, found and accepted at ALP, could be used as a benchmark for other international transactions with different AEs. The Third Member concluded that such internal comparables could not be used if they involved controlled transactions. The ruling emphasized that ALP must be determined by comparing with uncontrolled transactions, as per the statutory provisions.

Conclusion:

The Tribunal dismissed the appeal filed by the AO and partly allowed the appeal filed by the assessee for statistical purposes. The cross-objection by the assessee was dismissed as infructuous. The Tribunal emphasized the importance of using uncontrolled transactions for determining ALP and upheld the CIT(A)'s decision to exclude controlled transactions from comparability analysis.