2012 (12) TMI 71 - AT - Income Tax

Adjustment in Transfer Pricing - held that - whatever be the method followed or adopted for arriving at the ALP the ALP can only be determined on the value of international transactions alone and not on the entire turnover of assessee at entity level. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE transactions also which is not according to the provisions of Transfer Pricing mandated by the Act. The finally comparables margin on the updated data arrived at by the TPO was 6.29% as against assessee s margin of 5.19%. Therefore the addition on margin of 1.10% can only be determined on the AE transactions. With reference to royalty and the liquidated damages - genuineness of expenditure - whether the relevant royalty payments made on various projects were also taken into account in segmental data - held that - it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B TPO should not have undertaken determining the ALP at nil whereas the jurisdiction provided to him is to determine the ALP of the transactions under the method(s) provided under the Act. Therefore on legal principles also this adjustment made by AO cannot be upheld.

Issues Involved:
1. Transfer Pricing adjustment for import of spares and equipment.
2. Disregard of segmental data by the AO.
3. Transfer Pricing adjustments limited to transactions with Associated Enterprises (AEs).
4. Transfer Pricing adjustment for payment of royalty and project engineering and manufacturing drawing fees.
5. Double adjustment for royalty and project engineering fees.
6. Transfer Pricing adjustment for payment of liquidated damages.
7. Double adjustment for payment of liquidated damages.
8. Transfer Pricing adjustment for notional interest on payment received from AE.
9. Standard deduction under Section 92C(2) of the Act.
10. Legality of reference to the Transfer Pricing Officer under Section 92CA.

Detailed Analysis:

1. Transfer Pricing Adjustment for Import of Spares and Equipment:
The assessee contested the adjustment of Rs. 9,67,80,000 made by the AO, arguing that the entire amount was derived using the TNMM method at the entity level. The DRP upheld the TPO's view that adjustments should be made at the entity level. The Tribunal agreed with the assessee that adjustments should be restricted to international transactions only, not the entire turnover. The Tribunal cited several cases supporting this view, including DCIT v. Starlite and DCIT v. Ankit Diamonds. The Tribunal concluded that the adjustment should be limited to AE transactions, resulting in no need for adjustments as the ALP was within the +/- 5% range.

2. Disregard of Segmental Data by the AO:
The assessee provided segmental data to support its contention that its profits were higher than those of comparables. The DRP did not accept this data. The Tribunal noted that the segmental data was not prepared considering the royalty payments, impacting cost and profit margin calculations. The Tribunal decided not to consider the segmental data in this case.

3. Transfer Pricing Adjustments Limited to Transactions with AEs:
The Tribunal emphasized that adjustments should be restricted to international transactions alone and not applied to the entire turnover. This principle was supported by several cases, including IL Jin Electronics (I) (P.) Ltd. v. ACIT. The Tribunal ruled that the ALP can only be determined on the value of international transactions, not the entire turnover.

4. Transfer Pricing Adjustment for Payment of Royalty and Project Engineering and Manufacturing Drawing Fees:
The assessee argued that the payments were made under an approved agreement and had not been adjusted in previous years. The Tribunal agreed, citing the Delhi High Court in CIT v. EKL Appliances Ltd., which stated that the TPO cannot determine the ALP at nil. The Tribunal concluded that the adjustments were not justified.

5. Double Adjustment for Royalty and Project Engineering Fees:
The Tribunal did not specifically address this issue separately but implied that once adjustments are made at the entity level, individual adjustments should not be made again.

6. Transfer Pricing Adjustment for Payment of Liquidated Damages:
The assessee reimbursed its AE for liquidated damages paid to a third party. The TPO determined the ALP at nil. The Tribunal found that the payment was a business decision and should not be adjusted. The Tribunal cited the Delhi High Court in EKL Appliances, stating that the TPO should not disallow the entire expenditure.

7. Double Adjustment for Payment of Liquidated Damages:
The Tribunal did not specifically address this issue separately but implied that individual adjustments should not be made once adjustments are made at the entity level.

8. Transfer Pricing Adjustment for Notional Interest on Payment Received from AE:
The Tribunal confirmed the small adjustment of Rs. 32,359 for notional interest, noting that it was not seriously contested by the assessee.

9. Standard Deduction Under Section 92C(2) of the Act:
The Tribunal applied the proviso to section 92C(2) and concluded that the ALP determined was within the +/- 5% range, negating the need for adjustments.

10. Legality of Reference to the Transfer Pricing Officer Under Section 92CA:
The Tribunal did not specifically address this issue, implying it was not a primary concern in the judgment.

Conclusion:
The Tribunal allowed the assessee's appeal partly, directing the AO to modify the order accordingly. The adjustments for import of spares, royalty payments, and liquidated damages were deleted, while the small adjustment for notional interest was upheld. The Tribunal emphasized that adjustments should be restricted to international transactions and not applied to the entire turnover.

← Previous Next →