2012 (11) TMI 312 - AT - Income Tax

Deletion of Addition in arm s length price made by AO Held that - Arm s length price as determined by the TPO by applying the profit margin rate of 3.13% as compared to assessee s profit margin of 1.01%, then also admittedly it falls within the /- range of 5% as per second proviso to section 92C(2), which provides that if the variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price - department s grounds of appeal are rejected - In the result, appeal filed by the department is dismissed.

Issues:
1. Adjustments made by Transfer Pricing Officer on an Arms Length basis.
2. Determination of arm's length price for international transactions.
3. Comparability analysis of comparable parties.
4. Capacity utilization of the assessee company.
5. Adjustment made by the Assessing Officer/TPO.
6. Arm's length price falling within the range of 5%.
7. Dismissal of the department's appeal.

Adjustments made by Transfer Pricing Officer on an Arms Length basis:
The appeal was filed by the revenue against the order deleting the additions made by the Assessing Officer on account of adjustments made by the Transfer Pricing Officer (TPO) on an Arms Length basis. The TPO observed international transactions with associated enterprises (AEs) involving import of raw materials, export of goods, and payment of management fees. The TPO adopted the Transactional Net Margin Method (TNMM) for the computation of the arms length price and identified comparable parties. The TPO rejected the exclusion of depreciation allowance and the comparability analysis of one entity. The arms length price was determined based on the average mean of accepted comparables, resulting in an upward adjustment to the income of the assessee.

Determination of arm's length price for international transactions:
The TPO determined the arms length price by comparing the assessee's EBIT with the average EBIT of accepted comparables. The predominant international transaction was sales to associated enterprises, and an upward adjustment was made due to the sales not being at arm's length. The CIT(A) considered the comparability of margins and the arm's length nature of the transactions. The CIT(A) appreciated arguments regarding capacity utilization and the application of TPO's average mean percentage falling within the +/- range of 5%. Ultimately, the CIT(A) deleted the adjustment made by the TPO and the Assessing Officer after detailed discussion and analysis.

Comparability analysis of comparable parties:
The TPO conducted a comparability analysis of comparable parties to determine the arms length price for international transactions. Issues arose regarding the exclusion of depreciation allowance and the acceptance of comparables. The CIT(A) considered the comparability of margins and the capacity utilization of the manufacturing entities involved. The CIT(A) appreciated arguments related to the comparability of margins and the +/- range of 5% as per the second proviso to section 92C(2).

Capacity utilization of the assessee company:
Arguments were presented regarding the capacity utilization of the assessee company compared to comparable entities. The CIT(A) analyzed the capacity utilization of the manufacturing entities and its impact on the comparability of margins. The CIT(A) considered the arguments related to capacity utilization in determining the arm's length price for international transactions.

Adjustment made by the Assessing Officer/TPO:
The Assessing Officer made an adjustment to the income of the assessee based on the TPO's determination of the arms length price for international transactions. The CIT(A) reviewed the adjustments made by the TPO and the Assessing Officer, considering arguments on comparability, capacity utilization, and the +/- range of 5%. Ultimately, the CIT(A) deleted the adjustment after detailed discussion and analysis of the issues involved.

Arm's length price falling within the range of 5%:
The CIT(A) and the TPO discussed the arm's length price determined by the TPO falling within the range of 5% as per the second proviso to section 92C(2). Both parties conceded that the arm's length price determined by the TPO was within the acceptable range. Consequently, the department's appeal was rejected based on the arm's length price falling within the specified range.

Dismissal of the department's appeal:
After considering submissions and findings of the CIT(A) and the TPO, the Tribunal found it unnecessary to discuss various issues raised by them. The Tribunal noted that the arm's length price determined by the TPO fell within the range specified by law. Therefore, the department's appeal was dismissed, upholding the decision of the CIT(A) to delete the adjustments made by the Assessing Officer and the TPO.

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