2012 (3) TMI 336 - AT - Income Tax

Addition made by TPO rejected by CIT(A) - In respect of international transactions the assessee filed a report u/s 92E in Form no. 3CEB - The entire controversy in the present appeal revolves around the determination of ALP in respect of the Distribution segment - learned CIT(A) went by the assessee s declared Operating Profit (OP) margin at 1.63% ignoring the fact that TPO had rejected such OP rate and had instead determined operating loss at Rs. 14,86,852 - The contention is that since the assessee s OP rate of 1.63% falls within 1.405% to 10.795% (i.e. -5%), it would require no addition - Since this standard price constitutes the basis for making addition in the hands of the asssessee on account of its international transactions with the associated enterprises, the legislature, in order to iron out the creases, inserted proviso to section 92C(2) - When we refer to plus minus 5% of the value determined under this method as per proviso to section 92C(2), it inevitably refers to the figure determined under this method, which is price and not profit embedded in the price - it is noticed that the assessee argued before the learned CIT(A) that plus minus 5% adjustment to 6.1% margin of the remaining 2 comparable cases would give the range of 1.405% to 10.795% - it is sine qua non to decide the correctness of the operating profit/loss earned/incurred by the assessee from the international transactions - it will be just and fair if the impugned order is set aside and the matter is restored to CIT(A) - Appeal is allowed for statistical purpose

Issues Involved:
1. Transfer Pricing Adjustment.
2. Determination of Arm's Length Price (ALP).
3. Exclusion of Comparable Cases.
4. Application of Plus Minus 5% Adjustment.
5. Computation of Operating Profit/Loss.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal by the Revenue arises from the order passed by the Commissioner of Income-tax (Appeals) concerning the assessment year 2004-2005. The core issue is the disallowance of the addition made by the Assessing Officer (A.O.) on account of transfer pricing adjustment made by the Transfer Pricing Officer (TPO).

2. Determination of Arm's Length Price (ALP):
The assessee-company, a wholly owned subsidiary of Roche Group, filed its return declaring a loss. The TPO observed that the assessee performed functions of distributor and service provider to Roche Diagnostics Asia Pacific Pte. Ltd., Singapore. The TPO accepted the price in respect of Support services as at ALP, but disputed the ALP in the Distribution segment. The TPO found that five out of seven comparable cases chosen by the assessee were not comparable and included five new comparable cases, eventually shortlisting two cases, Span Diagnostics Limited and Casil Health Limited, determining the operating margin at 8.82%.

3. Exclusion of Comparable Cases:
The learned CIT(A) excluded the cases of Span Diagnostics and Casil Health chosen by the TPO, stating they were functionally different. For Casil Health, the Annual report indicated involvement in manufacturing and trading activities, making it non-comparable to the assessee's trading of diagnostic products. Similarly, Span Diagnostics was engaged in both manufacturing and trading activities without segmental data for trading of diagnostic products, leading to its exclusion.

4. Application of Plus Minus 5% Adjustment:
The CIT(A) accepted the assessee's contention that if plus minus 5% adjustment to the margin was allowed, the declared margin at 1.63% would be comparable to the uncontrolled transactions. The Tribunal agreed that plus minus 5% adjustment is allowable for determining ALP, but emphasized that the adjustment should be applied to the price of the transaction and not the profit margin. The Tribunal rejected the Revenue's contention that the adjustment should be applied to the operating profit margin alone, stating it would result in inconsistent calculations across different methods.

5. Computation of Operating Profit/Loss:
The Tribunal noted that the CIT(A) proceeded with the assessee's declared operating profit margin at 1.63%, ignoring the TPO's determination of an operating loss of Rs. 14,86,852. The Tribunal highlighted the necessity of determining the correct figure of operating profit/loss for comparison with the average price of uncontrolled transactions. The Tribunal held that the CIT(A) should have adjudicated on the correctness of the operating profit/loss along with the inclusion or exclusion of comparable cases. The Tribunal remanded the matter back to the CIT(A) for fresh determination of the operating profit/loss and subsequent decision on whether any addition is sustainable, considering the operating profit ratio of uncontrolled transactions at 6.1%.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, setting aside the impugned order and remanding the matter back to the CIT(A) for fresh proceedings, ensuring a comprehensive and fair determination of the issues involved.

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