2012 (12) TMI 1113 - AT - Income Tax

Tribunal allows appeal on transfer pricing and disallowances, remands for fresh examination

The Tribunal partly allowed the assessee's appeal, directing a fresh examination on transfer pricing adjustments for international transactions and ... Arm's Length Price - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Transfer Pricing - Commission as international transaction - Section 14A-expenditure relating to exempt income - Rule 8D-non-retrospective application - Opportunity of hearingArm's Length Price - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Transfer Pricing - Transfer pricing adjustment in respect of sales of polyester film products to two A.Es set aside and remitted for fresh comparability analysis adopting TNMM. - HELD THAT: - The Tribunal held that the TPO's rejection of the assessee's benchmarking and the Commissioner (Appeals)'s alternative approach were both flawed for the reasons stated in the coordinate bench's order in the assessee's own case. CUP analysis failed on comparability grounds because of material geographical and market differences and lack of appropriate internal/external comparables. Consequently, the Tribunal set aside the impugned order and restored the matter to the file of the TPO directing him to examine ALP afresh by adopting TNMM and to carry out a fresh comparability analysis; the assessee is to supply necessary information and the TPO must afford effective opportunity of hearing. [Paras 7]Impugned transfer pricing adjustment set aside; matter remitted to TPO to determine ALP using TNMM after fresh comparability analysis.Commission as international transaction - Arm's Length Price - Transfer Pricing - Adjustment to commission paid to A.E. upheld in part by adopting 10% as arm's length rate; benefit of +/-5% range disallowed. - HELD THAT: - On comparison of agency arrangements and functional analysis, the Tribunal accepted the Commissioner (Appeals)'s conclusion that differences between A.E. arrangements and non-A.E. agents justified a higher arm's length commission than the average non-A.E. rate; accordingly, commission at 10% was held to be at arm's length. However, the Commissioner (Appeals)'s application of an automatic +/-5% range in the proviso to section 92C was held to be erroneous and set aside. The Tribunal therefore partly allowed the ground by sustaining a 10% arm's length rate for commission paid to the A.E. [Paras 10, 11]Payment of commission to A.E. accepted at 10% as arm's length; the Commissioner (Appeals)'s +/-5% adjustment set aside.Section 14A-expenditure relating to exempt income - Rule 8D-non-retrospective application - Opportunity of hearing - Disallowance under section 14A for exempt dividend income cannot be computed by applying Rule 8D for AY 2006-07; matter remitted to Assessing Officer to compute disallowance on a reasonable basis without using Rule 8D. - HELD THAT: - The Tribunal observed that Rule 8D is not applicable retrospectively and therefore cannot be applied for assessment year 2006-07 in view of the jurisdictional High Court decision relied upon by the assessee. The Tribunal also noted the need for consistency with the Assessing Officer's earlier approach regarding certain investments and directed that the AO re-examine the nature of investments and attributable expenditure and work out a reasonable basis for any disallowance without resorting to Rule 8D; the assessee is to furnish necessary details. [Paras 17]Disallowance under section 14A to be recalculated by the Assessing Officer on a reasonable basis without applying Rule 8D; matter restored to AO.Opportunity of hearing - Addition of unexplained receipt remitted to Assessing Officer for fresh adjudication after affording the assessee adequate opportunity to explain and produce reconciliations. - HELD THAT: - The Tribunal found that the Assessing Officer passed the order in a short span after receiving DRP directions, resulting in insufficient time for the assessee to furnish explanations and reconciliations concerning the receipt in question. In view of the parties' submissions and the absence of effective opportunity, the Tribunal set aside the addition and directed the AO to pass a fresh order after giving due and effective hearing and after considering all details to be filed by the assessee. [Paras 22]Addition set aside; matter remitted to Assessing Officer for fresh adjudication after affording effective opportunity of hearing.Final Conclusion: Assessee's appeal is partly allowed: transfer pricing sale adjustments remitted to TPO for fresh determination under TNMM; commission to A.E. accepted at 10% (with proviso-based range disallowed); section 14A disallowance and unexplained receipt addition set aside and remitted for fresh consideration consistent with directions above. Issues Involved:1. Transfer pricing adjustment for international transactions of sale of polyester film products.2. Transfer pricing adjustment on account of commission paid to the A.E.3. Disallowance u/s 14A of the Act.4. Disallowance of unexplained receipts.Summary:1. Transfer Pricing Adjustment for International Transactions of Sale of Polyester Film Products:The assessee challenged the transfer pricing adjustment of Rs. 2,00,47,316 for the sale of polyester film products to its Associated Enterprises (A.Es). The Tribunal noted that the issue was identical to the assessee's own case for the assessment year 2005-06. The Tribunal found that the Transfer Pricing Officer (TPO) had made adjustments by comparing the average price charged to non-A.Es with the price charged to A.Es, rejecting the assessee's approach of comparing local sales in the Indian market. The Tribunal set aside the impugned order and directed the TPO to adopt the Transactional Net Margin Method (TNMM) and carry out a fresh comparability analysis, providing the assessee an opportunity to present necessary information.2. Transfer Pricing Adjustment on Account of Commission Paid to the A.E.:The assessee contested the adjustment of Rs. 9,80,596, where the TPO adjusted the arm's length rate of commission to 5% instead of 12.5%. The Tribunal referred to the assessee's own case for the assessment year 2005-06, where it was held that the arm's length commission rate should be 10%. The Tribunal upheld the rate of 10% as arm's length and set aside the benefit of +/- 5% given by the Commissioner (Appeals). Thus, the ground was partly allowed.3. Disallowance u/s 14A of the Act:The Assessing Officer (AO) disallowed Rs. 1,62,56,000 u/s 14A, applying Rule-8D, which was confirmed by the Dispute Resolution Panel (DRP). The Tribunal noted that Rule-8D is applicable only from the assessment year 2008-09, as per the Hon'ble Jurisdictional High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. The Tribunal directed the AO to re-examine the nature of investment and expenditure attributable to such investment and work out a reasonable basis without resorting to Rule-8D. The ground was partly allowed for statistical purposes.4. Disallowance of Unexplained Receipts:The AO added Rs. 28,685 as unexplained receipts from East West Freight Carriers Ltd., which was not credited in the Profit & Loss account. The assessee argued that the AO did not provide a proper opportunity to explain the transaction. The Tribunal set aside the impugned order and restored the matter to the AO, directing him to provide a proper opportunity to the assessee to present relevant details. The ground was allowed for statistical purposes.Conclusion:The assessee's appeal was partly allowed for statistical purposes, with directions for fresh examination and opportunity for representation on the contested issues.