2011 (12) TMI 178 - AT - Income Tax

Transfer Pricing - additions on account of GP rate and transfer pricing adjustment - benefit of 5% adjustment not given - adjustments made in relation to the entire sales A.Y. 2007-08 - Held that -The adjustments on account of transfer pricing are to be restricted only to the international transactions with the AE, and not to the entire turnover of the assessee as held in case of Dy. CIT v. Starlite 2010 (4) TMI 704 - ITAT, MUMBAI . Similarly, in the pre 01.10.2009 position, the benefit of 5% is to be allowed to the assessee, even in cases where difference in value of international transactions and its ALP is more than 5% as held in case of Emersons Process Management India (P.) Ltd. v. Add CIT ( 2011 (8) TMI 427 - ITAT MUMBAI ). The computation made by the AO is, therefore, required to be reworked. As regards the GP rate, addition was made due to fall in G.P. Rate the reason for which was explianed by assessee. The AO has not pointed out any defects in the books of accounts. In relation to international transactions with the AE, there is provision for separate TP adjustments, and merely because there is TP adjustment, entire books cannot be rejected in the absence of any defects. Further, while computing the GP rate for the year, for the purpose of comparison with the earlier year, the AO had not made any allowance for TP adjustments, which would also have impact on the GP rate and, therefore, making the additions on both the counts would result in double addition. Therefore, the order is set aside and restored back to A.O. for passing a fresh order .- Decided in favor for assessee for statistical purpose.

Summary

Issues Involved:
1. Transfer pricing adjustment.
2. Gross profit rate adjustment.

Transfer Pricing Adjustment:
The appeal was against the AO's order regarding additions on account of GP rate and transfer pricing adjustment. The AO noted international transactions with associated enterprises and referred the matter to the Transfer Pricing Officer (TPO) who computed a transfer pricing adjustment. The AO made additions based on the TPO's order, rejecting the assessee's objections. The assessee argued that the adjustment should only apply to international transactions with associated enterprises, not the entire sales turnover. The Tribunal agreed, citing precedents, and noted that a 5% adjustment should be allowed pre-01.10.2009 even if the difference in transaction value and its ALP exceeded 5%. The Tribunal directed a fresh computation of transfer pricing adjustments limited to international transactions with associated enterprises.

Gross Profit Rate Adjustment:
The AO rejected the assessee's explanation for a fall in the gross profit rate, alleging manipulation of transactions with associated enterprises. The AO did not accept reasons such as increased material costs, manufacturing expenses, and foreign exchange fluctuations. The Tribunal found the AO's rejection of accounts unjustified as no defects were pointed out. It noted that TP adjustments should be separate and not lead to the rejection of entire books of accounts without defects. The Tribunal observed that the AO did not provide clear evidence of calling for supporting evidence on increased costs. Additionally, the AO did not consider the impact of TP adjustments on the gross profit rate, leading to potential double additions. The Tribunal set aside the AO's order, directing a fresh examination and allowing the assessee an opportunity to be heard.

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fresh assessment considering the issues raised and the observations made.