2012 (1) TMI 60 - AT - Income Tax

Transfer Pricing adjustment in ALP Working Capital Adjustment to the unadjusted margins of the comparable companies Held that - Working capital is a factor which influence the price in the open market and constitutes a subject matter for adjustments in the matters relating to ALP in Transfer Pricing. It is the duty of the TPO to apply the provisions of rule 10B(1)(e). Net profit margin arising out of the comparable uncontrolled transactions should be adjusted to take into account differences, if any between the international transactions and filtered comparables of uncontrolled transactions or enterprises entering into such transactions, which could materially affect the amount of the net profit margin in the open market. Therefore, working capital adjustment is to be allowed while determining the Arm s Length operating Margin of the Comparables. Non granting of adjustments related to import expenses Held that - No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee s control. Therefore, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. Applicability of proviso to section 92C(2) Held that - Tribunal in case of Cummins India LTD vs CIT (2011 - TMI - 207660 - ITAT PUNE) has decided in favor of the assessee in support of grant of deduction of 5%, when multiple prices in establishing the arithmetic mean are involved. Thus the assessee s ground on this issue is allowed. Incorrect computation of TP adjustment on the entire manufacturing segment sales instead of computing it sales relatable to the import of the components and spares procured from the AEs only principle of proportionality - Held that - TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. Issues related to International transaction pertaining to export of components and spares, short grant of TDS/SA and charging of interest u/s 234B and 234C of the Act Held that - Matters are remitted back to file of A.O. to grant necessary relief. Issues being decided in favor of assessee for statistical purpose. We remand these grounds with the direction to the AO to rework the addition.

Issues Involved:
1. Adjustments to international transactions of provision of materials handling solutions.
2. Comparability analysis in benchmarking international transactions.
3. Aggregation of international transactions related to manufacturing and trading activities.
4. Determination of margin of manufacturing activities.
5. Adjustments for working capital, provision for warranty, and import expenses.
6. Computation of transfer pricing adjustment to manufacturing activity.
7. Use of multiple year data.
8. Use of contemporaneous data.
9. International transaction pertaining to export of components and spares.
10. Transfer Pricing adjustment without benefit of +/-5% under erstwhile proviso to sec 92C(2).
11. Allowance in respect of provision for warranty claim.
12. Reduction of sales by the amount of disallowance for warranty claims.
13. Short grant of credit for TDS/SA.
14. Levy of interest u/s 234B & 234C.

Detailed Analysis:

1. Adjustments to International Transactions of Provision of Materials Handling Solutions:
The assessee reported international transactions with its associate enterprises (AEs) and used the Transactional Net Margin Method (TNMM) for pricing. The Transfer Pricing Officer (TPO) rejected the combined benchmarking approach and demanded segment-wise details. The TPO determined an adjustment of Rs. 1,11,25,670/- by comparing the entity level margins of the comparables with the manufacturing segment of the assessee.

2. Comparability Analysis in Benchmarking International Transactions:
The TPO accepted the six comparables provided by the assessee but rejected the use of multiple year data. Instead, the TPO used current year data, leading to a variance in margins and subsequent adjustments.

3. Aggregation of International Transactions Related to Manufacturing and Trading Activities:
The assessee's approach of aggregating international transactions was rejected by the TPO, who insisted on segment-wise analysis. This led to separate adjustments for manufacturing and trading segments.

4. Determination of Margin of Manufacturing Activities:
The TPO compared the segment-wise operating margins of the manufacturing activities with the average margins of the comparables, leading to a calculated variance and adjustment.

5. Adjustments for Working Capital, Provision for Warranty, and Import Expenses:
The TPO denied adjustments for working capital, warranty provisions, and import expenses. The Tribunal, however, acknowledged the need for such adjustments to ensure accurate comparability and directed the TPO to allow these adjustments.

6. Computation of Transfer Pricing Adjustment to Manufacturing Activity:
The TPO computed the adjustment based on the entire manufacturing segment sales instead of proportionate sales related to imports from AEs. The Tribunal directed the TPO to recompute the adjustment on a proportionate basis.

7. Use of Multiple Year Data:
The TPO rejected the use of multiple year data and relied on current year data, which was contested by the assessee. The Tribunal upheld the use of current year data as per the provisions of Rule 10B(4) of the IT Rules, 1962.

8. Use of Contemporaneous Data:
The Tribunal emphasized the importance of using contemporaneous data for accurate benchmarking, aligning with the TPO's approach.

9. International Transaction Pertaining to Export of Components and Spares:
The TPO used the Resale Price Method (RPM) for benchmarking export transactions, leading to an adjustment of Rs. 8,36,293/-. The Tribunal directed the TPO to apply the TNMM method instead.

10. Transfer Pricing Adjustment Without Benefit of +/-5% Under Erstwhile Proviso to Sec 92C(2):
The Tribunal held that the assessee is entitled to the benefit of +/-5% variation as per the erstwhile proviso to section 92C(2), aligning with the decisions of various benches of the ITAT.

11. Allowance in Respect of Provision for Warranty Claim:
The Tribunal directed the AO to verify and allow actual warranty expenses incurred during the year, disallowing provisions and reversals.

12. Reduction of Sales by the Amount of Disallowance for Warranty Claims:
The Tribunal directed the AO to recompute the sales after considering the disallowance of warranty claims.

13. Short Grant of Credit for TDS/SA:
The Tribunal directed the AO to grant the necessary credit for TDS/SA after verification.

14. Levy of Interest u/s 234B & 234C:
The Tribunal held that the issues related to the levy of interest are consequential and directed the AO to recompute the interest after considering the Tribunal's findings.

Conclusion:
The Tribunal allowed the appeal of the assessee pro tanto, directing the AO/TPO/DRP to recompute the adjustments and grant necessary reliefs as per the Tribunal's findings.

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