2012 (8) TMI 330 - AT - Income Tax

Transfer pricing - adjustment - CIT(A) deleted addition on ground that difference between the ALP so worked out and the sales price shown by the assessee was less than the safe harbor limit of 5% - revenue contesting the same and inclusion of other cases - Held that - CIT(A) was fully justified in excluding the said three cases suggested by revenue since these were not exactly comparable with the case of the assessee and for the purpose of comparative study and deleting the addition made by the A.O. on account of TP adjustment after having found that the difference between the ALP worked out by excluding the said three cases from comparables and the sales price charged by the assessee to its AE was within the safe harbor limit of 5% - Decided against assessee. Interest on Income Tax refund - Business income vs Income from other sources - Held that - It is observed that there is a contradiction in the findings recorded by the A.O. conceding it to be interest on income-tax refund whereas and CIT (A) conceded it to be interest on bank deposits, hence matter restored to file of the A.O. to ascertain exact nature of interest income received.

Summary

Issues:
1. Treatment of interest income as business income or income from other sources.
2. Deletion of addition made by A.O. for transfer pricing adjustments.

Analysis:
1. The first issue revolves around the treatment of interest income by the A.O. and the Ld. CIT (A). The A.O. considered the interest income as income from other sources, while the Ld. CIT (A) accepted it as business income received on bank deposits. However, due to a contradiction in findings and lack of clarity on the nature of the interest income, the matter was remanded to the A.O. for fresh assessment to ascertain the exact nature of the interest income. The revenue's appeal on this ground was allowed for statistical purposes.

2. The second issue pertains to the deletion of an addition made by the A.O. for transfer pricing adjustments. The TPO had made adjustments based on certain comparables, leading to a substantial addition to the total income of the assessee. However, the Ld. CIT (A) found merit in the assessee's submission to exclude certain comparables with abnormally high operating margins. After recalculating the Arm's Length Price (ALP) and applying the OP/cost margin, the Ld. CIT (A) concluded that no addition was necessary as the difference fell within the safe harbor limit of 5%. The A.O.'s addition was thus deleted by the Ld. CIT (A) based on the revised calculations and exclusion of specific comparables.

3. Additionally, the TPO's inclusion of exchange difference in the operating cost was rectified, further reducing the operating cost of sales. The revised calculations showed that even with the TPO's OP/cost margin, no transfer pricing adjustment was warranted as the difference remained within the safe harbor limit. The Ld. CIT (A) justified the exclusion of certain comparables due to non-comparability with the assessee's case, leading to the deletion of the A.O.'s addition on TP adjustment. The revenue's appeal on this ground was dismissed, upholding the Ld. CIT (A)'s decision.

4. The Cross Objection raised by the assessee on transfer pricing adjustments was not pursued during the hearing, resulting in its dismissal. Overall, the appeal of the revenue was partly allowed, and the Cross Objection of the assessee was dismissed. The judgment provided detailed analysis and reasoning for each issue, ensuring a fair and thorough assessment of the matters at hand.