2013 (9) TMI 304 - AT - Income Tax

Tribunal upholds CIT(A)'s decision favoring assessee, citing flawed Transfer Pricing Officer comparison.

The Tribunal upheld the CIT(A)'s decision in favor of the assessee, dismissing the Revenue's appeal. The Tribunal found that the Transfer Pricing ... Adjustment of transfer pricing - ALP - Held that:- appellant company had prima facie demonstrated that its prices are comparable and Arm's length price fixed objectively, honestly and in a bona fide manner as required by statutory regulations. This being directly explained by the appellant and as held by the Delhi Bench of the Income-tax Appellate Tribunal, [Mentor Graphics (Noida) (P) Ltd. (2007 (11) TMI 339 - ITAT DELHI-H )] the same cannot be varied by the Transfer Pricing Officer or the Assessing Officer unless it can be shown that these aspects were not properly examined in the report submitted. Therefore, in the light of above decision of the Delhi Bench of the Tribunal, it is held that the Transfer Pricing Officer or the Assessing Officer should not have rejected the arm's length price determined by the appellant without showing how the pricing worked out by the appellant was incorrect or perverse. In the present case, the appellant was given the financial statements of M/s. Qpro Infotech Ltd. by the TPO with a direction to compare its transactions with that company. The appellant vide its letter dated 19-05-2006 demonstrated that its profit percentage is better than that of M/s. Qpro Infotech Ltd. as of March, 2004. The TPO however, did not accept the same and handed over the financial statements of another company, viz., M/s. New Gen Imaging Systems Pvt. Ltd. and directed the appellant company for comparison. The assessee company, vide its letter dated 06-11-2006 addressed to the TPO, explained that the line of activity of M/s. New Gen. Imaging Systems Pvt. Ltd. was different from them. Therefore, the assessee explained that it was a futile exercise to compare the uncomparables. The TPO however, disregarded these facts and proceeded to hold that the appellant's pricing is lower than the average rate of M/s. New Gen Imaging Systems Pvt. Ltd. and held that the appellant company has lowered its profit margin and has diverted its profit to the parent company. From the material placed on record and on a careful examination of the same, it is found that the learned TPO has erred in attempting to compare the financial statements of the assessee company with those of M/s. New Gen Imaging Systems Pvt. Ltd. because both these companies are uncomparable - TPO is arbitrary in assuming that the appellant has lowered Its profit margin by diverting its profit to the parent company. This assumption is found to be baseless. The TPO's observations with regard to the AE siphoning off the appellant's profits are based merely on surmises and conjectures. Moreover, the transfer pricing provisions, as narrated above under the Income-tax Act, nowhere authorises the TPO to arbitrarily estimate the transfer price. The basis recorded by the TPO is devoid of merits. Therefore, the addition of Rs. 1,58,59,366/- is directed to be deleted - Decided against Revenue. Issues Involved:1. Deletion of addition on account of Arm's Length Price (ALP) u/s 92CA.2. Entitlement to relief u/s 10B.3. Deletion of disallowance of pre-operative expenses and deferred revenue expenditure.4. Deletion of addition towards provision for outsourcing cost.5. Classification of interest on margin money.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Arm's Length Price (ALP) u/s 92CA:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 1,58,59,366/- determined by the Transfer Pricing Officer (TPO) as the Arm's Length Price (ALP). The TPO compared the profitability of the appellant with M/s. NewGen Imaging System (P.) Ltd. and concluded that the appellant charged its associated enterprise (AE) at a lower rate than the market rate. The CIT(A) observed that the TPO did not consider the differences in the type of business, environment, and risks between the appellant and NewGen. The appellant employed highly skilled personnel for typesetting scientific publications, while NewGen's work was more routine and less skill-intensive. The CIT(A) held that the TPO's comparison was flawed and that the appellant's transactions were at ALP as they corresponded to global market prices. The Tribunal upheld the CIT(A)'s decision, noting that the TPO's assumptions were arbitrary and not supported by evidence. The Tribunal also noted that in the subsequent assessment year, no adjustment was made by the TPO under similar circumstances.2. Entitlement to Relief u/s 10B:The Revenue argued that the CIT(A) erred in holding that the assessee is entitled to relief u/s 10B. However, this issue was not argued or pressed by the Revenue during the hearing. Consequently, the Tribunal dismissed this ground for want of prosecution.3. Deletion of Disallowance of Pre-operative Expenses and Deferred Revenue Expenditure:The Revenue contended that the CIT(A) erred in deleting the disallowance of pre-operative expenses and deferred revenue expenditure, arguing that these expenses did not relate to the year under consideration. This issue was also not argued or pressed by the Revenue during the hearing, leading to its dismissal for want of prosecution.4. Deletion of Addition Towards Provision for Outsourcing Cost:The Revenue argued that the CIT(A) erred in deleting the addition made towards the provision for outsourcing cost, stating that there was no justification for allowing the provision claimed by the assessee. This issue was not argued or pressed by the Revenue during the hearing, resulting in its dismissal for want of prosecution.5. Classification of Interest on Margin Money:The Revenue contended that the CIT(A) erred in holding that the interest on margin money should be assessed under the head 'business.' The Revenue cited the jurisdictional High Court's decision in Menon Impex Ltd. (259 ITR 403) to support its position. This issue was not argued or pressed by the Revenue during the hearing, leading to its dismissal for want of prosecution.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order in favor of the assessee. The Tribunal found no justifiable reason to interfere with the CIT(A)'s decision, especially given the lack of specific errors pointed out by the Revenue and the consistent treatment of the appellant's transactions in the subsequent assessment year. The other grounds of appeal were dismissed for want of prosecution as they were not argued or pressed during the hearing.