2014 (4) TMI 617 - AT - Income Tax

Determination of ALP - CUP method or Profit margin method Held that - The TPO has judiciously arrived at a conclusion for adopting a TNMM method and compared the financial results of the assessee company and the comparable company M/s. Audco India Ltd., though there are certain dissimilarities as observed by the CIT(A) - the products manufactured by both the companies are similar though not identical - There is nothing on record to suggest that the nature of business of both the companies is different - there were no other companies which were comparable other than the one pointed out by the TPO assessee has not brought out adequate materials on record for adopting cost plus method - CIT(A) has also not verified the computation adopted by the assessee by cost plus method and without any finding on the same simply deleted the addition made on the basis of TNMM method. The AO has excluded the research and development expenditure while arriving at the operational profit of M/s. Audco India Ltd. - both the companies are manufacturing identical type of products, it cannot be presumed that the assessee company has not incurred any expenditure on research and development thus, the computation of the ALP in the case of the assessee shall be reworked, by treating the difference in profit margin as nil and accordingly, any upward revision cannot be sustained for making addition towards increase in income based on determination of ALP Decided in favour of Assessee. Selection of comparables - Held that - There was no justification as to why the TPO had not adopted the comparable company M/s. Audco India Ltd., for the subsequent assessment year. Instead Ld. TPO has adopted two different companies M/s. Orson Holdings Co. Ltd and M/s. Sakthi Auto Ancillary P Ltd., as comparable companies the TPO without examining the intricacies of the assessee company and comparable companies cryptically arrived at the conclusion the matter is remitted back to the TPO for fresh adjudication Decided in favour of Revenue. Exclusion of sale of DEPB license u/s 80HHC of the Act Held that - The decision in Topman Exports v. CIT 2012 (2) TMI 100 - SUPREME COURT OF INDIA followed thus, the matter is required to be remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Summary

Issues Involved:
1. Computation of income from international transactions by determining the arm's length price (ALP) for A.Y. 2004-05 and A.Y. 2005-06.
2. Exclusion of profit on sale of DEPB license for computing deduction under Section 80HHC of the Act for A.Y. 2004-05.

Detailed Analysis:

1. Computation of Income from International Transactions by Determining the Arm's Length Price (ALP):

A.Y. 2004-05:
- The core issue was whether the cost plus method or the Transaction Net Margin Method (TNMM) should be used to determine the ALP.
- The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO), who used TNMM, comparing the assessee with M/s. Audco India Ltd., and made an upward adjustment of Rs. 72,95,381/-.
- The assessee argued that the cost plus method was more appropriate due to differences in business operations and risks between the assessee and the comparable company.
- The CIT(A) favored the assessee, noting that the TPO had not justified rejecting the cost plus method and highlighted significant operational differences between the assessee and M/s. Audco India Ltd.
- The Tribunal observed that the TPO had reasonably adopted TNMM but had not considered research and development expenses, which, if included, would nullify the profit margin difference.
- Consequently, the Tribunal held that the upward revision based on ALP determination could not be sustained.

A.Y. 2005-06:
- The TPO used TNMM again but compared the assessee with M/s. Orson Holdings Co. Ltd and M/s. Sakthi Auto Ancillary P Ltd, leading to an upward adjustment of Rs. 3.94 lakhs.
- The Tribunal found the TPO's selection of comparables inconsistent and remitted the matter back to the AO for re-examination.

2. Exclusion of Profit on Sale of DEPB License for Computing Deduction under Section 80HHC:
- The CIT(A) excluded the profit on the sale of DEPB license from the computation of deduction under Section 80HHC.
- Both parties agreed that the Supreme Court's decision in Topman Exports v. CIT (342 ITR 49) was applicable.
- The Tribunal remitted this issue back to the AO to be decided afresh in light of the Supreme Court's decision.

Conclusion:
- The appeal for A.Y. 2004-05 was dismissed, and the upward revision based on ALP determination was not sustained.
- The appeal for A.Y. 2005-06 was allowed for statistical purposes, with the matter remitted back to the AO for re-examination.
- The issue of the DEPB license profit exclusion was remitted back to the AO for fresh consideration in line with the Supreme Court's ruling in Topman Exports.

Order Pronounced:
- The order was pronounced on 9th January 2014 at Chennai.