2012 (6) TMI 237 - AT - Income Tax

Tribunal Partially Allows Appeal, Remands Issues for Reconsideration

The appeal was partly allowed for statistical purposes, with the Tribunal remanding various issues back to the Assessing Officer for reconsideration or ... Transfer pricing adjustments - arm's length price - comparables selection and filtering - use of powers under section 133(6) of the IT Act - risk adjustment in transfer pricing - FAR analysis - application of +/-5% variation in computing ALP - deduction under section 10A - treatment of export turnoverComparables selection and filtering - use of powers under section 133(6) of the IT Act - Remand to AO for reconsideration of comparables selected by the TPO and documents obtained under section 133(6) - HELD THAT: - The Tribunal, following the coordinate bench decision in Genisys Integrating Systems (India) (P.) Ltd., held that the TPO/AO must apply the turnover filter and afford the assessee an opportunity to rebut information and documents procured under section 133(6). The AO/TPO is directed to call for all information from comparables obtained under section 133(6), address the assessee's objections to additional comparables, and, if necessary after production of information, permit cross examination as a last resort to determine appropriateness of comparables. These matters are remanded for fresh consideration in accordance with the stated guidelines. [Paras 4]Remanded to the AO/TPO for re-consideration of comparables and documents obtained under section 133(6), with directions to apply turnover filter, permit rebuttal, obtain full information from comparables, and allow cross examination if required.Risk adjustment in transfer pricing - FAR analysis - arm's length price - Direction to TPO to reassess and decide appropriate percentage of risk adjustment after considering relevant material and FAR differences between assessee and comparables - HELD THAT: - The Tribunal accepted that the assessee, being a captive service provider operating on a cost plus basis, faces different risk exposure (an anticipated single customer risk) compared to comparables operating in the open market with existing marketing and technical risks. The Tribunal held that anticipated single customer risk is not equivalent to the existing market/technical risks of comparables and therefore the TPO should have considered a risk adjustment. While the assessee's specific proposal of 5.5% (or an adjustment based on prime lending rate differences) was not accepted, the Tribunal directed the TPO to consider all contentions and relevant material and determine the percentage risk adjustment in accordance with law. [Paras 5, 7]TPO directed to reconsider and determine an appropriate risk adjustment percentage after applying FAR analysis and relevant material; ground allowed for statistical purposes and remanded for fresh quantification.Arm's length price - risk adjustment in transfer pricing - Consequential issue of ALP computation remanded to AO/TPO for recomputation after risk adjustment - HELD THAT: - The Tribunal found sub ground (f) consequential upon the risk adjustment issue and remanded the matter to AO/TPO for recomputation of the arm's length price and related adjustments after the risk adjustment is determined. [Paras 8]Remanded for recomputation of ALP and consequential adjustments by AO/TPO after determination of risk adjustment.Deduction under section 10A - treatment of export turnover - Amount excluded from export turnover must be excluded from both export turnover and total turnover for computing deduction under section 10A - HELD THAT: - Following the Karnataka High Court decision in CIT v. Tata Elxsi Ltd., the Tribunal held that the specific amount identified by the assessee must be excluded from export turnover and, correspondingly, from total turnover when computing deduction under section 10A. The Tribunal directed the AO to give effect to that treatment. [Paras 9]AO directed to exclude the specified amount from export turnover as well as total turnover for computing deduction under section 10A.Application of +/-5% variation in computing ALP - transfer pricing adjustments - Allowing +/-5% variation for computation of arm's length price - HELD THAT: - Relying on earlier Tribunal precedents (Genisys Integrating Systems (India) (P.) Ltd. and Tatra Vectra Motors Ltd.), the Tribunal directed that a plus or minus 5% variation be given for the purpose of computing the ALP. The direction is applied to the present assessment for computation of transfer pricing adjustments. [Paras 10]AO directed to apply a +/-5% variation in computing the arm's length price; additional ground partly allowed for statistical purposes.Final Conclusion: The appeal is partly allowed for statistical purposes: issues relating to comparables and documents obtained under section 133(6), risk adjustment and consequential recomputation of ALP are remanded to the AO/TPO for fresh consideration as directed; the AO is directed to exclude the identified amount from both export and total turnover for section 10A purposes; and a +/-5% variation is to be allowed in computing the ALP. Issues:Transfer pricing adjustment based on TPO's directions, rejection of documentation, adjustment towards arm's length price, adoption of comparables, exclusion of amount from export turnover, risk adjustment in transfer pricing analysis, computation of deduction u/s 10A, providing benefit of +/- 5 percent in transfer pricing adjustment.Transfer Pricing Adjustment:The assessee challenged the adjustment made by the Transfer Pricing Officer (TPO) towards arm's length price, citing errors in rejecting documentation and selecting comparables. The Tribunal remanded the issues to the AO for reconsideration based on guidelines from a previous case. The assessee's objections to additional comparables were to be addressed, and opportunities for cross-examination were to be provided.Risk Adjustment in Transfer Pricing Analysis:The assessee sought a risk adjustment in the transfer pricing analysis, arguing that comparables faced marketing and technical risks not applicable to the assessee, a captive service provider. The Tribunal found the risk of a single customer to be anticipated and directed the TPO to consider the comparables' risks and make adjustments accordingly.Computation of Deduction u/s 10A:The Tribunal directed the Assessing Officer (AO) to exclude a specific amount from the export turnover and total turnover for computing the deduction under section 10A of the IT Act, following a decision by the High Court of Karnataka.Additional Ground of Appeal - +/- 5% Variation:The Tribunal allowed a +/- 5% variation for computing the Arm's Length Price (ALP) based on previous decisions, partially allowing the appeal for statistical purposes.In conclusion, the appeal was partly allowed for statistical purposes, with various issues remanded for reconsideration or adjustments based on legal guidelines and precedents. The Tribunal provided detailed analysis and directions on transfer pricing adjustments, risk adjustments, deduction computation, and the application of a +/- 5% variation in the ALP calculation.