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2012 (10) TMI 206 - AT - Income TaxTransfer pricing adjustments - ALP - AO while framing the assessment did not carry out the directions of the DRP in this behalf. - held that - AO has not carried out the rectification order passed by TPO and passed the assessment order without carrying out the DRP directions. - the issue of assessee being a non-risk bearing agent has to be looked into along with the suitability comparables. - matter remanded back to AO to reconsider the issue of transfer pricing in accordance with law after giving the assessee an opportunity of being heard. - at the time of dictation of this order the issue of 92C ( ) (-) adjustment is proposed to be amended which shall be kept in mind.
Issues involved:
Transfer pricing adjustments based on comparables, rectification order by TPO not applied by AO, directions by DRP not followed, working capital adjustment, 92C adjustment. Transfer Pricing Adjustments based on Comparables: The assessee appealed against the order of ACIT, challenging the selection of comparables by TPO/AO/DRP. The assessee argued that the selected companies were not functionally comparable, and the proposed comparables were erroneously rejected. The TNMM method was used to determine the ALP based on operating profit divided by operating cost. The TPO considered the assessee as a risk-bearing agent and rejected most comparables, leading to an adjustment. The DRP raised objections regarding the comparables, operating margins, working capital adjustment, and economic adjustments for risks. The DRP directed the AO/TPO to verify and grant working capital adjustment based on OECD guidelines. Rectification Order by TPO not Applied by AO: The TPO made an arithmetical error, for which the assessee filed a rectification application under section 154. However, the rectification effect was not applied by the AO in the final order. The AO did not carry out the directions of the DRP, leading to an incomplete assessment. The counsel requested the matter to be restored to the AO for reconsideration in light of the DRP directions and TPO's rectification order. Directions by DRP not Followed: The AO did not implement the directions given by the DRP regarding working capital adjustment, which was crucial for comparability. The DRP emphasized the importance of making adjustments for differences in working capital to ensure fair pricing. The AO's failure to consider the DRP directions led to an incomplete assessment, prompting the need for reconsideration. Working Capital Adjustment: The DRP directed the AO/TPO to verify and grant working capital adjustment based on the OECD formula, considering the PLR. The adjustment aimed to eliminate differences in working capital between the assessee and comparables to ensure fair pricing. The working capital adjustment was crucial for comparability and reflected the time value of money in pricing decisions. 92C Adjustment: The judgment highlighted a proposed amendment to the 92C adjustment, which was to be considered in future cases. The issue of 92C adjustment was mentioned in the context of setting aside the TP adjustments for reassessment by the AO. The proposed amendment to the 92C adjustment was noted for future reference in transfer pricing cases. In conclusion, the judgment addressed various issues related to transfer pricing adjustments, rectification orders, directions by the DRP, working capital adjustments, and a proposed amendment to the 92C adjustment. The decision set aside the TP adjustments for reassessment by the AO, emphasizing the need for proper consideration of comparables and adjustments to ensure fair pricing in transfer pricing cases.
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