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2013 (11) TMI 930 - AT - Income TaxTransfer pricing adjustment - Determination of arm's length price - Rejection of comparables - Held that - assessee is claiming sales to AEs at ₹ 322.58 crore and similar is the position regarding other components of operating costs including purchases. In such figures of purchases and sales from/to the AEs, not only the transactions with AEs but also certain transactions with Non-AEs stand included. Figure of purchases from AEs also includes purchases from Non-AEs where such purchases were used for sales to AEs. Similarly figure of sales to AEs also includes the figure of sales to Non-AEs where purchases from AEs were used for sales to Non-AEs. This shows that the figures of AE purchases and AE sales considered by the assessee for working out operating profit margin at 6.54% in respect of AEs also include Non-AE transactions. Such a course of action followed by the assessee to determine the profit margin from transactions with the AEs has absolutely no sanction of law. It rather defies and runs contrary to the very definition of 'international transactions' and the mandate of rule 10B(l)(e). Approving the course of action adopted by the assessee for calculating profit margin in respect of AE and Non-AE segments would require rewriting of the relevant provisions as discussed supra. By considering some transactions with Non-AEs also as a part of the AE segment, the computation of the operating profit margin in respect of AE transactions at 6.54% has completely lost its significance. Once the figure of OP/OC margin at 6.54% is itself incorrect, there can be no question of comparing it with that of Non-AE segment at 4.20%, which again stands distorted because of the exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into the AE segment. Related party transactions in this case are admittedly a little more than 20% but less than 25%. On page 11 of the order passed by the TPO, it can be seen that he adopted filter of related party transactions at 25%. - a case can be taken as uncontrolled if its related parties transactions do not exceed 25% of the total revenue. - the assessee suo motu included this case in the list of. comparables in its transfer pricing study when made on multiple year data (with average profit margin of 3.37%). However when the TPO required the assessee to furnish data of the comparable cases only for the relevant year, the assessee found this case as incomparable because of a higher entity level/segmental OP/TC ratio for the relevant year. The manifest reason for the assessee's exclusion of this case is not far to seek. We, therefore, accept the filter of 25% as applied by the TPO and admit this case for inclusion in the list of comparable cases. Now it has been mandated through the Finance Act, 2012 w.r.e.f. 1.4.2002 that plus minus 5% is not a standard deduction. It is significant to note that when the AO passed the impugned order on 25.09.2012, such amendment had already come into force. The consequences would have been different if the AO had allowed standard deduction of -5% and the Revenue had orally challenged the grant of such standard deduction contrary to the provisions of law, without there being any legal recourse available to file appeal against the order of the AO u/s 143(3) read with section 144C(13) at the relevant point of time. The case before us is that the AO did not grant such standard deduction and we are required to ascertain as to whether or not his action is sustainable in law. As has been noticed above that the law as on the date as also retrospectively applicable to the relevant assessment year is against the granting of such standard deduction, we see no reason to hold that the assessee be allowed -5% standard deduction in contravention of the legal provisions. This benefit of up to 5% can be allowed only if the variation between the price charged/paid in respect of international transaction and ALP determined by taking the results of comparable cases does not exceed 5%. In case such variation is more than 5%, then no such benefit of 5% can be allowed on standard basis - Decided in favour of assessee. Disallowance of royalty - Held that - assessee entered into collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee applied to the RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. A copy of letter addressed by the Central Bank of India to the RBI dated 26.03.2008 is available on page 240 of the paper book. Through this letter, the Central Bank of India forwarded relevant documents along with a copy of the agreement. The RBI vide its letter dated 21.04.2008 requested Central Bank of India to consider the assessee's case in accordance with its AP(DIR Series) No.76 dated 24.02.2007. It is in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its AE. It is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at Rs. Nil, is anybody's guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP - Decided in favour of assessee.
Issues Involved:
1. Adjustment of Rs. 5,10,61,123 in respect of international transactions. 2. Denial of plus-minus 5% benefit under the proviso to section 92C(2) of the Act. 3. Adjustment of Rs. 4,29,03,966 pertaining to payment of royalty. 4. Non-credit of Rs. 23,30,040 for demand adjusted against refund for the assessment year 2007-2008. 5. Charging of interest under section 234B. Detailed Analysis: 1. Adjustment of Rs. 5,10,61,123 in respect of international transactions: The assessee, engaged in turnkey services for various plants, reported international transactions with Associated Enterprises (AEs) amounting to Rs. 23.48 crore for imports and Rs. 82.23 crore for exports. The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Net Operating Margin to Sales (OP/Sales), reporting a margin of 4.63%. The Transfer Pricing Officer (TPO) proposed adjustments, which were reduced by the Dispute Resolution Panel (DRP) to Rs. 5.10 crore. The assessee's objections included the use of internal TNMM and the inclusion/exclusion of certain comparable cases. Internal TNMM: The assessee argued that its internal transactions with AEs showed a higher profit margin (6.54%) compared to Non-AEs (4.20%). However, the TPO rejected this due to discrepancies in the segmental data and the inclusion of Non-AE transactions in AE segments. The Tribunal upheld the TPO's view, noting that the figures provided by the assessee were not reliable and did not comply with the definition of 'international transactions' as per the Act. External TNMM: The TPO included six comparable cases, with the average PLI of 12.72%. The Tribunal addressed the inclusion/exclusion of specific comparables: - Tata Projects Limited: The Tribunal upheld the TPO's revised calculation of OP/TC at 4.13%. - Walchandnagar Industries Limited: The Tribunal upheld the revised OP/TC ratio of 9.63%. - Mcnally Bharat Limited: The Tribunal upheld the revised OP/TC ratio of 8.67%. - TRF Limited: The Tribunal directed the use of segment-level results instead of entity-level. - Gillanders Arbuthnot & Company Ltd.: The Tribunal directed the inclusion of the Engineering Division's segmental results. - Engineers India Limited: The Tribunal excluded this company due to its status as a Government Undertaking and high related party transactions. - Sriram EPC Limited: The Tribunal upheld its inclusion as comparable. The Tribunal directed the AO/TPO to re-compute the ALP based on the revised list of comparables. 2. Denial of plus-minus 5% benefit under the proviso to section 92C(2) of the Act: The DRP had directed to allow the plus-minus 5% benefit, but the AO did not grant it. The Tribunal upheld the AO's decision, citing the retrospective amendment by the Finance Act, 2012, which clarified that the benefit is not a standard deduction but applicable only if the variation is within 5%. 3. Adjustment of Rs. 4,29,03,966 pertaining to payment of royalty: The assessee paid royalty and technical fees to its AE, which were approved by the RBI. The TPO determined the ALP at Rs. Nil. The Tribunal found that the payments, being approved by the RBI, should be considered at ALP and directed to delete the adjustment of Rs. 4.29 crore. 4. Non-credit of Rs. 23,30,040 for demand adjusted against refund for the assessment year 2007-2008: The Tribunal directed the AO to verify the factual aspect and pass an appropriate order after allowing a reasonable opportunity of being heard to the assessee. 5. Charging of interest under section 234B: This issue was deemed consequential and disposed of accordingly. Conclusion: The appeal was partly allowed, with directions to re-compute the ALP based on the revised list of comparables, delete the adjustment for royalty payment, verify the non-credit of demand adjusted against refund, and dispose of the interest issue as consequential.
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