2015 (10) TMI 468 - AT - Income Tax

Determination of arm s length price - whether method adopted by the Assessing Officer to determine arm s length price is not correct and is in violation of the Transfer Pricing Regulation as existing in India? - whether the actual profit can be calculated on the basis of comparing the gross profit of subsequent years of the assessee itself? - CIT(A) deleted the addition - Held that - According to Provisions of Section Rule 10B(4), the data to be used in analyzing the comparability of uncontrolled transaction with an international transaction shall be data relating to financial year in which international transaction has been entered into provided that data related to period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence to transactions being compared. There in nothing in the provisions of Rule 10B(4) that data of subsequent years should be taken into to determine arm s length price. In this factual and legal background, it is evident that method adopted by Assessing Officer to determine arm s length price is not correct and not in accordance with transfer pricing regulation as existing in India. Accordingly, addition made by Assessing Officer by way of Transfer Pricing Adjustment on this account was rightly deleted by CIT(A). This reasoned finding of CIT(A) needs no interference from our side, we uphold the same. - Decided against revenue.

Summary

Issues Involved:
Transfer Pricing Adjustment - Methodology and Compliance with Transfer Pricing Regulations

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment - Methodology
The primary issue in this case pertains to the Transfer Pricing Adjustment made by the Assessing Officer and the subsequent appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals). The Assessing Officer had made an adjustment of &8377; 85,31,198/- based on the Transfer Pricing Adjustment made by the assessee at &8377; 1,42,98,923/-. The Assessing Officer noted a discrepancy in the gross profit ratio shown by the assessee in the current assessment year compared to subsequent years. The assessee argued that the profit benchmark of 9.65% was derived from a structured search process using databases like Prowess and Capitalineplus, reflecting the mean of operating margins earned by comparable companies over time. However, the Assessing Officer did not accept this argument and made the adjustment based on the lack of comparable companies in the same business as the assessee. The Assessing Officer contended that the only comparable entity for the assessee would be itself, based on the gross profit ratios of subsequent years. Consequently, the Assessing Officer added &8377; 85,31,198/- to the total income of the assessee.

Issue 2: Compliance with Transfer Pricing Regulations
The crux of the matter revolved around the compliance with Transfer Pricing Regulations in determining the arm's length price. The Revenue contended that the method adopted by the Assessing Officer was incorrect and in violation of the Transfer Pricing Regulations, despite the assessee having a worldwide monopoly in the manufacturing of oil field equipment. The Revenue argued that the actual profit should be calculated by comparing the gross profit of subsequent years of the assessee itself. However, the Authorized Representative for the assessee reiterated that the gross profit of 9.65% was based on a structured search process and that the subsequent years' ratios could not be used to determine the arm's length margin as it would be inconsistent with Indian Transfer Pricing Legislation. The Authorized Representative highlighted Rule 10B(4) of the Income Tax Rules, emphasizing that the data used for comparability analysis should relate to the financial year in which the international transaction occurred, with a provision to consider data from up to two years prior if influential. The Tribunal upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer, stating that the method adopted was not in accordance with the existing Transfer Pricing Regulations.

In conclusion, the appeal filed by the Revenue was dismissed, affirming the decision of the Commissioner of Income Tax (Appeals) to delete the Transfer Pricing Adjustment made by the Assessing Officer.