2012 (4) TMI 288 - AT - Income Tax

Transfer Pricing rejection of PLI considered by the appellant in the transfer pricing documentation benefit of 5% adjustment assessee engaged in the business of manufacturing automobile catalysts AY 2003-04 - Held that - Principal of res judicata cannot apply in case of Transfer Pricing and it is open to authorities to adopt different and appropriate PLI. PLI are the ratios that measure relationship between profits with costs or resources. Use of a particular PLI depends on a number factors including, nature of activities of tested party, the reliability of available data with respect to uncontrolled comparables and the extent of which the PLI is likely to produce available measure of income. The PLI is selected with its appropriateness for the transaction under view. With regard to nature of business of assessee, ROCE is not appropriate PLI. Further, purchase cost of the raw material cannot be said to be a pass through cost as assessee claims. Hence, operating profit as a percentage of total cost has to be the basis instead of operating profit as a percentage of the total cost minus raw material cost. Benefit of 5% adjustment Held that - Such benefit cannot be considered to be a standard/universal deduction. This benefit is available only if ALP shown by the taxpayer falls within 5% of arithmetic mean of more than one price determined by the Most Appropriate Method. As the taxpayer was not falling in above range, it was not entitled to any benefit. Secondly, the option is available only when taxpayer is computing the ALP and not when AO /TPO is computing the ALP Decided against the assessee.

Issues Involved:
1. Legality of the CIT (A)'s order under section 250.
2. Rejection of the Arm's Length Price (ALP) determined by the appellant.
3. Appropriateness of the Profit Level Indicator (PLI) used by the appellant.
4. Introduction of a new PLI by the CIT (A) and treatment of raw material costs.
5. Adjustment of +/-5% while determining the ALP.
6. Inclusion of interest income in business income for deduction under section 80HHC.

Detailed Analysis:

1. Legality of the CIT (A)'s Order:
The appellant contended that the CIT (A)'s order under section 250 was bad in law and on the facts of the case. However, this ground was general and did not require separate adjudication. Hence, it was dismissed for statistical purposes.

2. Rejection of the Arm's Length Price (ALP):
The appellant argued that the CIT (A) and the AO/TPO erred in not accepting the ALP determined by the appellant. The TPO had adopted the Operating Profit/Total Cost (OP/TC) ratio method as the PLI, which showed a significant variance from the appellant's disclosed OP/TC. The CIT (A) upheld the TPO's rejection of the appellant's PLI, stating that the Return on Capital Employed (ROCE) was not appropriate for the appellant's business model.

3. Appropriateness of the Profit Level Indicator (PLI):
The appellant used ROCE as the PLI, arguing it was suitable given their business model and pricing arrangement. However, the CIT (A) and TPO found ROCE inappropriate, as it did not reliably measure capital employed and was not suitable for the appellant's manufacturing operations. The CIT (A) and TPO introduced OP/TC as the new PLI, which was upheld by the tribunal.

4. Introduction of a New PLI and Treatment of Raw Material Costs:
The appellant contended that raw material costs should be excluded from total costs when using OP/TC as the PLI. The CIT (A) rejected this, stating that the raw material costs were not pass-through costs and must be included in the total cost base. The tribunal upheld this view, noting that the appellant's agreements and accounting practices did not support the exclusion of raw material costs.

5. Adjustment of +/-5% While Determining the ALP:
The appellant argued for a standard +/-5% adjustment in determining the ALP. The CIT (A) and tribunal held that this adjustment was not a standard deduction but a tolerance band. If the arithmetic mean of the comparable prices fell within this band, no adjustment was necessary. However, if it exceeded the band, the actual working without the +/-5% adjustment was to be considered. The tribunal upheld the CIT (A)'s decision in this regard.

6. Inclusion of Interest Income in Business Income for Deduction Under Section 80HHC:
The revenue contended that interest income should be assessed as income from other sources and not as business income, thus not qualifying for deduction under section 80HHC. The CIT (A) granted relief based on ITAT's decisions in the appellant's earlier assessment years. The tribunal followed the ITAT's earlier orders, as there was no higher court reversal, and dismissed the revenue's appeal on this ground.

Conclusion:
Both the appellant's and revenue's appeals were dismissed. The tribunal upheld the CIT (A)'s decisions on all issues, including the rejection of the appellant's PLI, the inclusion of raw material costs in the total cost base, and the treatment of interest income for section 80HHC deduction. The +/-5% adjustment was clarified as a tolerance band rather than a standard deduction.

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