2012 (12) TMI 558 - AT - Income Tax

Re opening of assessment - international transactions exceeded Rs. 15 Crores - Held that - As decided in ACIT Versus Rajesh Jhaveri Stock Brokers P. Limited 2007 (5) TMI 197 - SUPREME COURT for resorting to Section 147 the basic condition to be satisfied is that A.O. should have a reason to believe that income chargeable to tax had escaped assessment. As in the present case turnover of an assessee in international transaction exceeding Rs. 15 Crores and rules of Department requiring a compulsory scrutiny of such cases cannot in any way be deemed as a reason to believe that there was escapement of income. No reasonable man can come to such a belief based on such a reasoning. There was no relevance of the reason cited with the reopening done. Therefore the re-opening suffered from a fundamental flaw. Upward adjustment to the arm s length price to its associate enterprises - Rejection of internal comparables and TNMM analysis based on internal comparables by TPO - Held that - ITAT in the preceding assessment year concluded that the assessee was justified in undertaking internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario and the same should be the basis for determination of arm s length price in respect of international transactions undertaken with the associated enterprise. It was further concluded that the TPO had no mandate to have recourse to external comparables when in the present case internal comparables were available which could be applied for determining the arm s length price of international transactions with AEs - The Revenue have also not placed any material so as to enable us to take a different view in the matter in the present year. Transfer pricing adjustment based on TNM method are to be applied on transaction levels and not at enterprise level. If that be so nothing stops an assessee from making internal TNM study for justifying the value of its international transactions as long as it can show that it had sufficiently uncontrolled transaction with non-AEs which could give a meaningful analysis. The benchmarking that has to be done in TNMM can be either with an external party or based on segmental result of the assessee itself. International transfer pricing methodology does not reject an internal TNM method or stipulate that TNMM based could be based only on external comparables. In a nutshell the view taken by the lower authorities that TNMM could not be adopted on internal analysis cannot be accepted. Admittedly the PLI for AE transaction was 3.91% only as per assessee s own working against 4.4% for non-AE transactions. Thus by adopting 4.4% as the comparable PLI the expected operating profit on operating cost of Rs. 22, 52, 92, 028 will be Rs. 99, 12, 849/-. The operating profit shown by the company is Rs. 88, 61, 863/-. So the upward revision that can be made by adopting ALP will be Rs. 10, 50, 986.23. A.O. is directed to consider this amount as the upward adjustment necessary on account of fixation of ALP. Ordered accordingly.

Summary

Issues Involved:
1. Upward adjustment to the arm's length price (ALP) in respect of sales to associate enterprises (AEs).
2. Jurisdiction for resorting to re-assessment under Section 147 of the Income-tax Act, 1961.
3. Appropriateness of the method used for transfer pricing analysis.
4. Validity of re-opening the assessment.
5. Application of safe harbour rules.

Detailed Analysis:

1. Upward Adjustment to the Arm's Length Price (ALP):
The assessee's primary grievance was the upward adjustment of Rs. 1,25,85,937/- to the ALP for sales to its AEs. The assessee claimed it used the Transactional Net Margin Method (TNMM) for internal comparables, but the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) relied on external comparables. The TPO selected external comparables, M/s Kariwala Industries Ltd. and M/s Meenakshi (India) Ltd., resulting in an average margin of 11.29%, significantly higher than the assessee's 3.91%. The DRP later restricted the upward adjustment to Rs. 1,25,85,937/- after excluding one comparable.

2. Jurisdiction for Resorting to Re-assessment:
The assessee contested the jurisdiction for re-assessment, arguing that the reasons recorded for reopening did not satisfy Section 147 of the Income-tax Act. The reopening was based on the fact that the value of international transactions exceeded Rs. 15 Crores, necessitating compulsory scrutiny. The Tribunal found this reason insufficient, emphasizing that the Assessing Officer (A.O.) must have a reason to believe that income chargeable to tax had escaped assessment, which was not demonstrated in this case.

3. Appropriateness of the Method Used for Transfer Pricing Analysis:
The TPO rejected the assessee's internal TNMM analysis, arguing it could not be applied with internal comparables and that only the Comparable Uncontrolled Price (CUP) method was appropriate. The DRP supported this view, noting that indirect costs could not be uniformly allocated based on turnover. However, the Tribunal found that the internal TNMM analysis was valid, especially since the indirect expenses were minimal compared to direct expenses. The Tribunal cited the decision in Birlasoft (India) Ltd. v. DCIT, supporting the use of internal comparables for TNMM.

4. Validity of Re-opening the Assessment:
The Tribunal scrutinized the validity of reopening the assessment. It referenced the judgments in Rajesh Jhaveri Stock Brokers (P) Ltd. and CIT v. Kelvinator of India Ltd., which clarified that the A.O. must have a tangible reason to believe that income had escaped assessment. The Tribunal concluded that the reason provided (compulsory scrutiny due to transaction value) did not meet this requirement, rendering the reopening invalid.

5. Application of Safe Harbour Rules:
The Tribunal addressed the application of safe harbour rules, which allow a variation of up to 5% from the arithmetical mean of determined prices. Given that the TPO's external comparable was rejected, only one price (the internal TNMM result) remained. Therefore, the safe harbour provision could not apply. The Tribunal recalculated the necessary upward adjustment to Rs. 10,50,986.23 based on the internal TNMM analysis.

Conclusion:
The Tribunal allowed the assessee's appeal in part, holding that the reopening of the assessment was invalid and that the internal TNMM analysis was appropriate. The upward adjustment to the ALP was recalculated to Rs. 10,50,986.23.