2013 (9) TMI 408 - AT - Income Tax

Transfer pricing adjustment - Selection of comparables - Abnormal expenses - Low capacity utilization - Held that - adjustment in case of the manufacturing segment has been made on the total turnover and not limited to transactions with AE. The sales of AE was Rs. 7,88,70,082/- and, therefore, the AO is required to compute the cost of such sales by applying margin in case of the assessee which was (-)5.41%. Thereafter, PLI of 9.49% is required to be added to the cost of sales to arrive at the market value of the international transaction. The AO is directed to make the adjustment only to the international transaction and not to the entire turnover. The assessee had selected seven comparables, which have been rejected by the TPO holding them not comparable as being not engaged in trading of diamonds and on account of related party transactions in some cases. The TPO selected ten comparables giving mean margin of 3.47%. The assessee objected to six of comparables selected by TPO and the objections were rejected after giving specific reasons in respect of each comparables as mentioned in para 4.3 earlier. The assessee in the appeal before us has also raised objections in relation to some of the comparables. However we find, that the submission made by the learned AR was quite general in nature not supported by any evidence. No details of P&L account and balance sheet or annual reports were filed in respect of some comparables to substantiate the claim. The objection raised in relation to comparables is therefore rejected. However we find substance in the additional ground raised by the assessee requesting for benefit of /-5% margin. The additional ground has already been admitted by us being a legal ground. We, therefore direct the AO to allow the benefit of /- 5 % benefit to the assessee, which has also not been objected to by the learned DR before us - Decided partly in favour of assessee

Summary

Issues Involved:
1. Transfer pricing adjustments in manufacturing and trading segments.
2. Selection of comparables by the Transfer Pricing Officer (TPO).
3. Disallowance of expenses under section 40(a)(ia).
4. Allowing safe harbour limit of +/- 5%.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments in Manufacturing and Trading Segments:

The assessee disputed the adjustments made by the AO under transfer pricing for both manufacturing and trading segments. The TPO had asked the assessee to submit the details of the transfer pricing study for determining the arm's length price (ALP) of the international transactions. The assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method.

Manufacturing Segment:
- The assessee selected seven comparables with an arithmetic mean margin of 5.45%.
- The TPO rejected four comparables and accepted three, resulting in an arithmetic mean margin of 6.19%.
- The TPO added nine more comparables, resulting in a final arithmetic mean margin of 9.49%.
- The TPO made an adjustment of Rs. 2,33,69,009/- based on a PLI of 9.49%.

Trading Segment:
- The assessee selected seven comparables, all of which were rejected by the TPO.
- The TPO selected ten new comparables with an arithmetic mean margin of 3.47%.
- The TPO made an adjustment of Rs. 99,58,969/- based on a PLI of 3.47%.

2. Selection of Comparables by the TPO:

The assessee objected to the exclusion of certain comparables and the inclusion of new comparables by the TPO. The Tribunal upheld the TPO's decision, stating that the TPO had provided valid reasons for rejecting certain comparables and selecting new ones. The Tribunal also noted that the assessee had not provided sufficient evidence to support its objections.

3. Disallowance of Expenses under Section 40(a)(ia):

The AO disallowed expenses amounting to Rs. 6,18,437/- due to the delay in payment of TDS. The assessee failed to provide documentary evidence to support the timely deduction and payment of TDS. The Tribunal upheld the AO's decision, confirming the disallowance under section 40(a)(ia).

4. Allowing Safe Harbour Limit of +/- 5%:

The assessee raised an additional ground requesting the benefit of the safe harbour limit of +/- 5%. The Tribunal admitted this ground and directed the AO to allow the benefit of +/- 5% as per the law, which was also not objected to by the learned DR.

Conclusion:

The Tribunal upheld the TPO's selection of comparables and the PLI applied. The Tribunal also confirmed the disallowance of expenses under section 40(a)(ia) due to the lack of evidence for timely payment of TDS. However, the Tribunal directed the AO to make the adjustment only to the international transaction in the manufacturing segment and allowed the benefit of +/- 5% margin for the trading segment. The appeal of the assessee was thus partly allowed.