2015 (12) TMI 684 - AT - Income Tax

Transfer pricing adjustment - selection of comparable as loss making company - Held that - When loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction. So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly. Commission on marketing of machines and commission of marketing of spares - Held that - The Tribunal further held that the international transactions pertaining to receipt of commission from marking of machines benchmarked by the assessee aggregating with domestic operations using TNMM should not be rejected. Nothing contrary has been brought to our knowledge on behalf of Revenue. Facts being similar, so following the same reasoning, Assessing Officer is directed to grant of relief to the assessee for the year under consideration i.e. A.Y. 2006-07 on the line of A.Y. 2007-08 discussed above.

Issues Involved:
1. Transfer pricing adjustment of Rs. 83,177,072/-
2. Non-acceptance of data in the transfer pricing study report
3. Non-applicability of transfer pricing provisions to EOU operations
4. Comparability of Stovec Industries Limited
5. Use of multiple year data
6. Use of contemporaneous data
7. Consideration of commercial reasons for lower margins
8. Adjustment for differences in functional and risk profiles
9. Applicability of +/-5% range
10. Comparison of gross margins and sale price of CL-450 machines
11. Comparison of commission on marketing of machines and spares
12. Benchmarking of international transactions excluding trading activities
13. Benchmarking international transactions using Resale Price Method
14. Applicability of +/-5% range for domestic operations
15. Levy of penalty under section 271(l)(c)
16. Levy of interest under sections 234B, 234C, and 234D

Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 83,177,072/-:
The appellant challenged the transfer pricing adjustment made to international transactions related to Export Oriented Unit (EOU) operations and domestic operations. The Tribunal dismissed this ground as not pressed.

2. Non-Acceptance of Data in Transfer Pricing Study Report:
The Tribunal noted that the appellant's data pertaining to EOU operations provided in the transfer pricing study report was not accepted. This issue was also dismissed as not pressed.

3. Non-Applicability of Transfer Pricing Provisions to EOU Operations:
The appellant argued that transfer pricing provisions should not apply to EOU operations entitled to a tax holiday under section 10B of the Act. This ground was dismissed as not pressed.

4. Comparability of Stovec Industries Limited:
The Tribunal addressed whether Stovec Industries Limited was comparable to the appellant. The DRP had rejected Stovec as a comparable due to differences in manufacturing, risk assumptions, and Stovec being a loss-making company. The Tribunal directed the TPO to include Stovec Industries Limited for comparability, noting that Stovec had earned a margin of 2.39% in FY 2003-04, thus not a persistent loss maker.

5. Use of Multiple Year Data:
The appellant used multiple year data to reduce variability in results. The Tribunal supported the use of multiple year data, as it captures market cycles and reduces distortions from using single year data. This ground was dismissed as not pressed.

6. Use of Contemporaneous Data:
The Tribunal noted that the TPO computed the arm's length price using financial information available at the time of assessment, which was not available when the appellant complied with regulations. This ground was dismissed as not pressed.

7. Consideration of Commercial Reasons for Lower Margins:
The appellant argued that commercial reasons for lower margins were not considered. This ground was dismissed as not pressed.

8. Adjustment for Differences in Functional and Risk Profiles:
The appellant contended that the TPO compared full-fledged risk-bearing entities with the appellant's EOU operations without making risk adjustments. This ground was dismissed as not pressed.

9. Applicability of +/-5% Range:
The Tribunal noted that the TPO did not consider the 5% variation permitted under section 92C(2) of the Act. This ground was dismissed as not pressed.

10. Comparison of Gross Margins and Sale Price of CL-450 Machines:
The appellant argued against the comparison of gross profit margins and sale prices of CL-450 machines sold to associated enterprises and domestic third parties. This ground was dismissed as not pressed.

11. Comparison of Commission on Marketing of Machines and Spares:
The Tribunal found that the TPO erred in comparing the commission on marketing machines with the commission on marketing spares. The Tribunal directed the Assessing Officer to grant relief, following the reasoning in the appellant's case for A.Y. 2007-08.

12. Benchmarking of International Transactions Excluding Trading Activities:
The appellant's contention on benchmarking international transactions excluding trading activities was dismissed as not pressed.

13. Benchmarking International Transactions Using Resale Price Method:
The appellant argued against the use of the Resale Price Method for benchmarking international transactions related to the import of trading spares. The Tribunal directed the Assessing Officer to follow the reasoning in the appellant's case for A.Y. 2007-08.

14. Applicability of +/-5% Range for Domestic Operations:
This ground was dismissed as not pressed.

15. Levy of Penalty under Section 271(l)(c):
The appellant contended that the penalty under section 271(l)(c) was proposed without considering that the adjustment was due to a difference of opinion. This ground was dismissed as not pressed.

16. Levy of Interest under Sections 234B, 234C, and 234D:
The Tribunal noted that the levy of interest under sections 234B, 234C, and 234D was consequential to the adjustments made.

Conclusion:
The appeal was partly allowed, with specific directions provided for the inclusion of Stovec Industries Limited as a comparable and relief granted for the comparison of commission on marketing machines and spares. The Tribunal emphasized the importance of consistency in applying transfer pricing principles across different assessment years.

← Previous Next →