2014 (3) TMI 23 - AT - Income Tax

Transfer pricing adjustment Services to Associated Enterprise Rejection of analysis for determination of ALP of International transaction - Held that - All that is necessary for the purpose of computing arm s length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted - It is not at all necessary that a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit - the authorities below in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. The allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project - We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO - the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable - the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions - Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable thus, the authorities were clearly in error in rejecting the internal comparable, i.e. profitability of assessee s transactions with non AEs, on the ground that the volume of business with non AEs was too small vis- -vis business with AEs - the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non -AEs Decided in favour of Assessee. Addition on sales/services rendered by Head Office Held that - In the absence of assessee s cooperation by submission of requisite information, the Assessing Officer had no option except to resort to the addition on estimate basis Following the decision as decided in assessee s own case for the previous year, the same has been decided in favour of Assessee thus, the addition made is set aside Decided in favour of Assessee.

Issues Involved:
1. Transfer Pricing Adjustment for Services to Associated Enterprises (AEs)
2. Addition on Account of Sales/Services Rendered by Head Office
3. General Grounds

Detailed Analysis:

1. Transfer Pricing Adjustment for Services to Associated Enterprises (AEs)
The assessee, a Dutch company with a branch in India, challenged the transfer pricing adjustment of INR 2,72,42,940 made by the Assessing Officer (AO) for the assessment year 2008-09. The AO, Dispute Resolution Panel (DRP), and Transfer Pricing Officer (TPO) rejected the economic analysis undertaken by the assessee for determining the arm's length price (ALP) of international transactions with its AEs. The TPO rejected the segmental profit and loss accounts for AE and Non-AE segments, claiming that they were not maintained separately and were artificially created to allocate costs and reduce losses. The TPO also rejected the internal Transactional Net Margin Method (TNMM) and used external comparables instead. The DRP upheld the TPO's findings, leading to an addition of INR 2,72,42,940.

Upon review, the Tribunal found that Rule 10B(1)(e) of the Income Tax Rules does not require net profit computations for internal comparables to be based on audited books of accounts. The Tribunal held that the authorities erred in rejecting the segmental results based on the lack of audit and maintenance in the normal course of business. The Tribunal noted that the allocation of expenses on a man-hour basis was fair and reasonable and that the TPO did not point out specific defects. The Tribunal concluded that the size of the uncontrolled transaction does not render it incomparable and that the assessee was justified in adopting internal TNMM. Consequently, the Tribunal deleted the ALP adjustment of INR 2,72,42,940.

2. Addition on Account of Sales/Services Rendered by Head Office
The assessee challenged the addition of INR 86,571,076 made by the AO, which was 50% of the receipts on account of sales/services rendered by the head office. The AO adopted an ad-hoc rate of 25% to determine gross profit from sales/services in India and attributed 50% of it to the permanent establishment (PE) in India. The assessee argued that once the PE was remunerated at arm's length, no further income could be attributed to the PE.

The Tribunal noted that the issue was covered in favor of the assessee by its order dated 31st October 2013 for the assessment year 2006-07. The Tribunal saw no reason to deviate from the earlier view and deleted the impugned addition of INR 86,571,076, granting relief to the assessee.

3. General Grounds
Grounds 1, 4, and 5 were either general in nature or did not require specific adjudication based on the facts of the case.

Conclusion:
The Tribunal allowed the appeal, deleting the transfer pricing adjustment of INR 2,72,42,940 and the addition of INR 86,571,076 on account of sales/services rendered by the head office. The decision was pronounced in the open court on 21st February 2014.

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