2011 (5) TMI 222 - AT - Income Tax

Tax Tribunal Upholds ALP Determination in Assessee's Favor

The Tribunal dismissed both the assessee's and the department's appeals, upholding the CIT(A)'s decisions on all issues. The Tribunal's decisions were ... Arm's Length Price - The Ld. CIT(A) has erred in deleting the addition of Rs. 12,37,05,850 made on account of difference of Arm's Length Price - The assessee company is primarily engaged in providing receivable management services to its offshore clients - During the year under consideration, the assessee had undertaken international transactions with its associate enterprises - The AO referred the matter under section 92CA to the Transfer Pricing Officer for determining the arm's length price of the international transactions entered into by the assessee with the associate enterprises - Hence, the issue was decided by the CIT(A) against the assessee in the light of the learned CIT(A)'s order passed in assessment years 2003-04 and 2004-05 which was affirmed by the Tribunal - The CIT(A) observed that there being no change in the facts in the current year vis-à-vis earlier years, he did not interfere with the finding for the earlier years.FAR analysis - Determination of ALP - The Ld. CIT(A) has erred in not affording any opportunity to the TPO before proceeding to compute the margin of the comparables and the assessee.' - the contention of the appellant that 'FAR analysis' forms the basic foundation on which the ALP is determined and its importance just cannot be overemphasized - The appellant has been provided full opportunity during the course of appellate proceedings , to present the facts of the case, including FAR analysis and on consideration of same the ALP has been determined in subsequent paras.'Whether ALP of international transaction between the assessee and its AE can exceed a total amount of revenue earned from clients by the assessee and its associate enterprises together - he same issue was decided in favour of the assessee in the assessment year 2003-04 by the CIT(A) which was confirmed by the Tribunal and since there was no consequent change in facts of the current year, the CIT(A) held that 1.40% of the revenue to be retained by the associate enterprises is adequate to compensate it for its marketing activities and the assessee is entitled to 98.6% of the amount earned by associated enterprises from independent clients. The learned CIT(A) therefore, restricted the ALP to Rs. 60,32,18,954 being 98.6% of the total revenue of Rs. 61,17,83,929. ALP determined - Benefit of adjustment of 5% - the assessment year under consideration, the benefit of adjustment of 5% has been allowed to the assessee because of the reason that difference between the ALP determined by the learned CIT(A) and the price of international transactions declared by the assessee was within the range of 5% - Since the ALP determined by the CIT(A) is within 5% range of the price declared by the assessee, the benefit of 5% adjustment under Proviso to section 92C(2) has been rightly given by the learned CIT(A) in the current year under consideration - Hence, uphold the order of the CIT(A) on the issue of determination of ALP in the current year under consideration - Thus, the grounds raised by the revenue are rejected. Issues Involved:1. Eligibility of interest-free fixed deposits for deduction under section 10A.2. Exclusion of miscellaneous income while computing deduction under section 10A.3. Determination of Arm's Length Price (ALP) in transfer pricing.4. Computation of ALP considering revenue earned by associated enterprises.5. Applicability of +5% adjustment under Proviso to section 92C(2).Detailed Analysis:Issue 1: Eligibility of Interest-Free Fixed Deposits for Deduction under Section 10AThe assessee argued that interest-free fixed deposits with banks for bank guarantees, interest in fixed deposits kept as lien in favor of IBM for obtaining computers on lease, and other interest earned during the course of business should be eligible for deduction under section 10A. The Tribunal had previously decided against the assessee in similar cases for the assessment years 2003-04 and 2004-05, referencing the Supreme Court decision in Liberty India v. CIT. Following this precedent, the Tribunal upheld the CIT(A)'s decision against the assessee.Issue 2: Exclusion of Miscellaneous Income while Computing Deduction under Section 10AThe Assessing Officer (AO) excluded miscellaneous income while computing the deduction under section 10A. The Tribunal, following its earlier decisions, upheld the CIT(A)'s order, which was consistent with the Tribunal's stance in previous years.Issue 3: Determination of Arm's Length Price (ALP) in Transfer PricingThe AO referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP for international transactions with associated enterprises. The TPO made an adjustment of Rs. 12,37,05,850. The CIT(A) framed several issues for adjudication, including whether the AO/TPO erred in determining the ALP by taking the appellant as the tested party and rejecting the ALP determined by the appellant. The CIT(A) upheld the AO/TPO's determination, emphasizing that the taxpayer's ALP should be subject to scrutiny to prevent profit shifting. The CIT(A) also agreed that the ALP could not exceed the total revenue earned by the assessee and its associated enterprises.Issue 4: Computation of ALP Considering Revenue Earned by Associated EnterprisesThe CIT(A) held that the ALP of international transactions could not exceed the total revenue earned by the assessee and its associated enterprises. The CIT(A) determined that 1.40% of the revenue retained by the associated enterprises was adequate compensation for marketing activities, entitling the assessee to 98.6% of the revenue. This approach was consistent with decisions in previous years, which the Tribunal upheld. The CIT(A) recomputed the ALP accordingly, confirming an addition of Rs. 2,90,74,219.Issue 5: Applicability of +5% Adjustment under Proviso to Section 92C(2)The CIT(A) allowed the benefit of a +5% adjustment under Proviso to section 92C(2) because the difference between the ALP determined and the value of international transactions declared by the assessee was within the 5% range. The Tribunal upheld this decision, noting that the CIT(A) had correctly applied the adjustment.Conclusion:The Tribunal dismissed both the assessee's and the department's appeals, upholding the CIT(A)'s decisions on all issues. The Tribunal's decisions were consistent with its prior rulings and the Supreme Court's guidance, ensuring that the ALP determination and related adjustments were in line with established legal principles and precedents.