2012 (8) TMI 590 - AT - Income Tax

Transfer pricing - adjustment to international transaction in the nature of marketing support services, consultancy services and low end services to group companies - assessee contesting adjustment on various grounds - assessee contended exclusion of companies who are earning extraordinary profits - objection to arbitrary rejection of comparable - objection to inclusion of certain companies viz CMC Ltd. for having 58.82% related party transactions, ICC International Agriculture Ltd. & TSR Darashaw for having significantly higher operating margin than the average margin - Held that - It is observed that specific issues raised by the assessee before DRP have not been addressed and decided by way of a speaking order. It can be seen from the list of comparables selected by TPO that none of the other parties except ICC, TSR and CMC Ltd. have margin of more than 26.67%. If out of 13 comparables except three comparables do not have margin of the magnitude which ICC & TSR have then there is a merit in the contention of the assessee that these comparables should not be taken as comparable on account of their having super normal profits. Nothing contrary to this has been demonstrated by Revenue Further, contention of the assessee that the loss making companies which have been excluded being not persistent loss making companies should be excluded is also required to be examined in detail. Hence, matter should be restored back to the file of DRP with a direction to pass a speaking order. It is also held that appropriate relief should be given to assessee for safe harbour of 5% as per laws. Dis-allowance of marketing expenses incurred in foreign currency - business expediency - Held that - It is observed that assessee has furnished chart to show that all these expenses have been recovered as cost has also been able to show that most part of the cost is incurred on the media covering Indian territory. Since DRP has passed non-speaking order hence matter restored back to the file of DRP with a direction to bring all these facts on record and re-decide this issue. Dis-allowance of travelling expenses incurred in respect of travel to countries like USA, UK, Hong Kong , Sri Lanka etc, except Singapore where AE of the assessee is situated - Held that - When complete details are filed, dis-allowances cannot be made on adhoc basis as it has to be brought out that a particular expenditure was not incurred for the purpose of business of the assessee. Matter restored back - Decided in favor of assessee for statistical purposes

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Marketing Expenses
3. Disallowance of Travelling Expenses
4. Double Disallowance of Marketing and Travelling Expenses
5. Proposed Penalty under Section 271(1)(c)
6. Levy of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:

General Ground Challenging the Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of Rs. 53,976,994/- made to its international transactions involving marketing support services, consultancy services, and low-end services to group companies.

Use of Contemporaneous Data:
The assessee argued that the arm's length price (ALP) was computed using financial information of comparable companies available at the time of assessment, which was not available when the assessee complied with the regulations.

Use of Multiple Year Data:
The assessee contended that the operating margins of comparable companies should be based on financial data from the prior two years, as permitted by Rule 10(B)(4) of the Income Tax Rules, 1962, rather than only the year ending 31 March 2007.

Application of Turnover Filter:
The assessee argued that the application of the turnover filter for identifying comparable companies was improperly rejected, leading to the acceptance of companies without considering their scale of operations and turnover.

Exclusion of Certain Companies:
The assessee claimed that some comparables selected by it were arbitrarily rejected without providing any reason.

Inclusion of CMC Ltd.:
The inclusion of CMC Ltd. as a comparable was contested due to its substantial related party transactions amounting to 58.82% of total revenue.

Acceptance of Companies Earning Super Normal Profits:
The assessee argued against the selection of companies with supernormal profits as comparables, specifically ICC International Agriculture Ltd. (82.92%), TSR Darashaw Ltd. (78.29%), and CMC Ltd. (31.74%).

Adjustment for Differences in Working Capital Position and Risk Profile:
The assessee contended that no adjustments were made for differences in working capital position and risk profile between the comparable companies and the assessee.

Applicability of +/-5% Range:
The assessee argued that the arm's length price should consider the lower 5% variation from the mean, as permitted under section 92C(2) of the Act.

Erroneous Levy of Interest under Section 234B:
The assessee contended that if the transfer pricing adjustment is sustained, the interest under section 234B should not be levied based on the use of updated financial data for the comparable companies.

Tribunal's Decision on Transfer Pricing Adjustment:
The Tribunal restored the issue to the Dispute Resolution Panel (DRP) to pass a speaking order on the inclusion and exclusion of comparables and re-adjudicate the adjustment in accordance with law after giving the assessee a reasonable opportunity of hearing. The Tribunal also directed that if the mean margin of comparables does not exceed 5% from the margin of the assessee, appropriate relief should be given for the safe harbour of 5%.

2. Disallowance of Marketing Expenses:

Ground Raised:
The assessee contested the disallowance of Rs. 12,712,134 incurred in foreign currency for marketing expenses, arguing that these expenses were incurred wholly and exclusively for the purpose of business and should be allowable under section 37(1) of the Act.

Tribunal's Decision:
The Tribunal restored the issue to the DRP to ascertain whether the expenses were reimbursed and whether the claim that most expenses were incurred on media covering Indian territory was valid. The DRP was directed to redecide the issue after giving the assessee a reasonable opportunity of hearing.

3. Disallowance of Travelling Expenses:

Ground Raised:
The assessee challenged the disallowance of Rs. 6,000,000 incurred in foreign currency for travelling expenses, arguing that these expenses were incurred wholly and exclusively for the purpose of business.

Tribunal's Decision:
The Tribunal restored the issue to the DRP to pass a speaking order on the disallowance sustained and directed the AO to give appropriate relief to the assessee regarding the sum of Rs. 47,49,719/-.

4. Double Disallowance of Marketing and Travelling Expenses:

Ground Raised:
The assessee argued that the marketing and travelling expenses were disallowed without appreciating that these expenses were incurred wholly and exclusively for the purpose of business and were part of its invoice/revenue. The assessee contended that if these expenses were disallowed, the recovery of the said cost through invoicing should also not be taxed.

Tribunal's Decision:
The Tribunal directed the DRP to re-adjudicate the issue of double disallowance after giving the assessee a reasonable opportunity of hearing.

5. Proposed Penalty under Section 271(1)(c):

Ground Raised:
The assessee contested the proposal to initiate penalty proceedings under section 271(1)(c) of the Act in respect of transfer pricing adjustment and disallowance of marketing expenses and travel expenditure incurred in foreign currency.

Tribunal's Decision:
This issue was not specifically addressed in the Tribunal's decision.

6. Levy of Interest under Section 234B:

Ground Raised:
The assessee argued that the interest under section 234B was erroneously computed and should be recalculated considering the self-assessment tax paid.

Tribunal's Decision:
The Tribunal restored the matter to the AO to recalculate the interest under section 234B as per the provisions of law after giving the assessee a reasonable opportunity of hearing.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with several issues restored to the DRP and AO for re-adjudication as per the Tribunal's directions. The Tribunal emphasized the need for a speaking order and reasonable opportunity of hearing for the assessee.

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