2012 (11) TMI 216 - AT - Income Tax

Tribunal remits issues for reassessment, upholds transfer pricing adjustment, and sets aside expense disallowance.

The Tribunal allowed the assessee's appeal for statistical purposes, remitting both issues back to the respective authorities for reconsideration and ... Addition made to the arm's length price - alleged that value of assessee's international transactions with Associated Enterprises (AE) was in excess of ₹ 5 Crores - Assessee's submission was that Comparable Uncontrolled Price (CUP) method could not be applied since materials purchased from AE and from unrelated entities were technically different – Held that:- Assessee has to be given an opportunity to explain what adjustments it would like to carry out to the prices determined under CUP method so as to adjust such differences and make it fit for comparison as stipulated in sub-rule (2) of rule 10B - matter requires re-visit by the TPO for correctly assessing the prices that could be adopted under CUP method for comparison after carrying out the adjustment required - TNM method could not have been adopted in the circumstances of the case, we remit the matter back to TPO and Assessing Officer for determining the arm's length price under CUP method after making required adjustment stipulated in law. Assessee has to substantiate with sufficient evidence the adjustments that are reasonably required to be made for rendering the prices comparable - ground taken by the assessee relating to determination of arm's length price, is allowed for statistical purposes. Issues Involved:1. Addition to the arm's length price on the international transaction.2. Disallowance of expenses related to earning dividend income claimed exempt.Detailed Analysis:1. Addition to the Arm's Length Price on the International Transaction:The assessee, a company engaged in manufacturing fuel injection equipment, declared a total income of Rs. 64,60,00,616/- for the assessment year. The value of its international transactions with Associated Enterprises (AE) exceeded Rs. 5 Crores, prompting a reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Income-tax Act, 1962. The assessee used the Transactional Net Margin (TNM) method to determine the arm's length price, arguing that the Comparable Uncontrolled Price (CUP) method was unsuitable due to technical differences in materials purchased from AE and unrelated entities. The TPO rejected the TNM method, citing substantial related party transactions in comparable companies and significant price variations between purchases from AEs and non-AEs. The TPO recommended an upward adjustment of Rs. 55,93,380/-.The assessee objected, arguing that the items from AEs and non-AEs were not comparable and that further processing was required for non-AE components. The Dispute Resolution Panel (DRP) upheld the TPO's decision, stating that the assessee failed to substantiate its claims and could make adjustments under Rule 10B(1)(a) of Income-tax Rules, 1962. The Tribunal agreed with the lower authorities that the TNM method was inappropriate due to substantial related party transactions and differences in functionality among comparables. However, the Tribunal remitted the matter back to the TPO to determine the arm's length price under the CUP method after making necessary adjustments as stipulated in law. The assessee was directed to substantiate the required adjustments with sufficient evidence.2. Disallowance of Expenses Related to Earning Dividend Income Claimed Exempt:The Assessing Officer applied Rule 8D for the assessment year 2006-07 to disallow expenses of Rs. 13,93,025/- related to earning dividend income claimed exempt. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81, held that Rule 8D is applicable from the assessment year 2008-09 onwards. For earlier assessment years, a disallowance under Section 14A was required. The Tribunal set aside the disallowance and remitted the issue back to the Assessing Officer for fresh consideration. The assessee was allowed to produce records to substantiate its contention that no expenses were incurred, and the Assessing Officer was directed to proceed in accordance with the law.Conclusion:The appeal of the assessee was allowed for statistical purposes, with both issues remitted back to the respective authorities for reconsideration and appropriate adjustments.