2012 (6) TMI 138 - AT - Income Tax

Transfer Pricing - ALP - rejection of addition of three new comparable by the assessee before the DRP - Held that - This was rightly rejected by the DRP. Assessee itself had selected two comparable companies originally and such a selection was done based on a detailed analysis. In this situation, assessee cannot be allowed to bring in a new set of comparable, for if allowed, it will result in an unending exercise since endeavor of all assessee would be to bring the ALP within comparable range - Decided against the assessee. Correctness of method adopted by AO - Held that - AO divided the total operating cost between material cost relatable to AEs and cost relatable to non-AEs, which included both material cost as well as other costs. Thus the ALP cost arrived at by TPO was not logical. He deducted from the operating cost, only the material cost relatable to purchases from AEs and not the operating cost attributable to such material cost. The resultant figure will not give ALP of the purchases made from AEs. Matter requires a re-visit by the AO insofar as it relates to determination of ALP of the purchases made from AEs - matter remanded back On contention of assessee that adjustment ought have been allowed on the margins with reference to M/s Halonix Ltd., for a reason that it had different functionality it is held that ALP analysis is made under TNM method. TNM method is generally preferred where functions are not strictly comparable, but when the tested and comparables were in the same lines of business.

Summary

Issues Involved:
1. Addition under Transfer Pricing Provisions.
2. Disallowance under Section 14A of the Income-tax Act, 1961.

Issue-wise Analysis:

1. Addition under Transfer Pricing Provisions:

Facts:
The assessee, engaged in auto components manufacturing, had international transactions with four Associated Enterprises (AEs) involving import of raw materials, import of machinery, and payment for royalty and technical assistance. The assessee considered all these transactions together in its Transfer Pricing (TP) analysis using the Transactional Net Margin Method (TNMM), selecting two comparables: M/s Halonix Ltd. and M/s Fiem Industries Ltd., and arrived at an arithmetic mean of 19.27% as the operating profit of such companies.

TPO's Analysis:
The Transfer Pricing Officer (TPO) reworked the Profit Level Indicator (PLI) of the comparables, resulting in an average PLI of 10.52%. The TPO determined that a downward adjustment of Rs. 13.18 Crores was required to bring the purchase cost at par with the arm's length price. The TPO rejected the assessee's objections, stating that ALP had to be determined with reference to AE transactions and not enterprise-level profits.

DRP's Confirmation:
The Dispute Resolution Panel (DRP) confirmed the TPO's adjustments, rejecting the assessee's request to include three more comparables and the plea for a +5% safe harbour benefit.

Tribunal's Findings:
The Tribunal noted that the DRP rightly rejected the inclusion of new comparables as the assessee had initially selected two comparables after an exhaustive search. The Tribunal also found that the plea for adjustment based on different functionalities of M/s Halonix Ltd. was not raised before any authorities below and was not justified.

However, the Tribunal identified a logical error in the TPO's method of computation. The TPO deducted only the material cost related to AE purchases from the total operating cost, without considering the operational cost attributable to such material cost. This resulted in an erroneous ALP determination. The Tribunal remitted the issue back to the Assessing Officer (A.O.) for a fresh consideration, emphasizing that the correct computation of ALP should include a pro rata division of other costs.

2. Disallowance under Section 14A:

Facts:
The A.O. made a disallowance under Section 14A of the Income-tax Act, 1961, which pertains to the expenditure incurred in relation to income not includible in total income.

Tribunal's Findings:
The Tribunal held that the disallowance under Section 14A required a fresh look by the A.O. since Rule 8D was held by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. Dy. CIT (328 ITR 81) to be applicable prospectively and not for earlier years. The Tribunal remitted the issue back to the A.O. for consideration afresh based on reasonable criteria.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with the issues related to the computation of ALP and disallowance under Section 14A being remitted back to the A.O. for fresh consideration.