2013 (12) TMI 243 - AT - Income Tax

Tribunal limits transfer pricing adjustment to imports from associated enterprises

Demag Cranes and Components (India) P. Ltd. Versus Deputy Commissioner of Income-tax

The Tribunal partly allowed the appeal by restricting the transfer pricing adjustment to sales related to imports from associated enterprises. It directed ... Transfer pricing adjustment pertaining to import – Held that:- Following assessee’s own case for the A.Y. 2006-07 [2012 (1) TMI 60 - ITAT Pune] and IL Jin Electronics (I) (P.) Ltd. Versus Assistant Commissioner of Income-tax [2009 (11) TMI 669 - ITAT DELHI] - The transfer pricing adjustments are to computed not considering the entity level sales - It should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the associate enterprises, i.e. controlled cost - The principle of proportionality is relevant here - Decided in favour of assessee. Unadjusted margins on account of working capital differences – Held that:- Following the assessee’s own case for the A.Y. 2006-07 [2012 (1) TMI 60 - ITAT Pune] - After considering working capital adjustment as against the unadjusted arm’s length margin of the comparable companies adopted by the Transfer Pricing Officer - The difference in working capital materially affects, the margins of the comparable companies for the purposes of benchmarking the assessee's international transactions – The matter was restored for fresh decision. Additional expenses incurred for import of raw materials – Held that:- Following Skoda Auto India P. Ltd. v. Asst. CIT [2009 (3) TMI 249 - ITAT PUNE-A] – The issue was restored for fresh decision. Computation of Arm’s length price – Variation of 5% - Held that:- The issue was restored for fresh decision in view of amendment to section 92C made by the Finance Act, 2012. Material handling solutions – Whether Assembling/ manufacturing, sales/ distribution, providing technical and after sales services can be clubbed for benchmarking the international transactions - Held that:- It is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance - The activity of installation and commissioning/engineering services is “closely linked” with the manufacturing activity and deserves to be aggregated and construed as a single transaction for the purposes of determining the arm’s length price as per the method adopted – In appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method - The issue was restored for fresh decision. Issues Involved:1. Transfer pricing adjustment of Rs. 6,36,05,887.2. Non-consideration of comparability analysis in the transfer pricing study report.3. Rejection of aggregation of international transactions related to manufacturing activity.4. Incorrect determination of margin of manufacturing activity.5. Non-grant of working capital adjustment.6. Non-grant of adjustment for expenses on import of raw materials, components, and spares.7. Incorrect computation of transfer pricing adjustment to the manufacturing activity.8. Applicability of +/-5% range in computing arm's length price.9. Use of multiple year data for comparables.10. Use of contemporaneous data in computing arm's length price.11. Erroneous levy of interest under section 234B.12. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Transfer Pricing Adjustment of Rs. 6,36,05,887:The appellant challenged the transfer pricing adjustment made by the Assessing Officer based on the Transfer Pricing Officer's (TPO) determination of the arm's length price (ALP). The TPO enhanced the ALP by Rs. 6,36,05,887, which was affirmed by the Dispute Resolution Panel (DRP). The Tribunal acknowledged the appellant's plea that the adjustment should be restricted to the sales pertaining to the import of components and spares from associated enterprises only, rather than the entire sales of the manufacturing segment. This plea was supported by precedents and was upheld by the Tribunal, allowing the appellant's ground.2. Non-Consideration of Comparability Analysis in Transfer Pricing Study Report:The appellant argued that the TPO and Assessing Officer erred in not considering the comparability analysis documented in the transfer pricing study report. This ground was dismissed by the Tribunal as it was deemed general in nature and not requiring specific adjudication.3. Rejection of Aggregation of International Transactions Related to Manufacturing Activity:The appellant contended that the TPO unjustly disagreed with the transfer pricing study's combined transaction approach for benchmarking international transactions related to manufacturing. The Tribunal found merit in the appellant's argument, noting that the transactions were closely linked and should be aggregated for transfer pricing analysis. The Tribunal directed the Assessing Officer to revisit this issue and adopt a combined transaction approach where appropriate.4. Incorrect Determination of Margin of Manufacturing Activity:The appellant argued that the TPO incorrectly determined the margin of the manufacturing activities by excluding certain transactions. The Tribunal found that the TPO's approach was flawed and directed the Assessing Officer to recompute the margins considering all relevant transactions.5. Non-Grant of Working Capital Adjustment:The appellant's plea for a working capital adjustment was supported by a precedent in its own case for the previous assessment year. The Tribunal directed the Assessing Officer to verify the appellant's claim and allow the adjustment if warranted.6. Non-Grant of Adjustment for Expenses on Import of Raw Materials, Components, and Spares:The appellant argued for an adjustment due to additional expenses incurred on imports, which was denied by the lower authorities. The Tribunal, referencing a precedent in the appellant's own case, directed the Assessing Officer to consider this adjustment and verify the appellant's claims.7. Incorrect Computation of Transfer Pricing Adjustment to the Manufacturing Activity:The appellant contended that the transfer pricing adjustment should be computed only on the sales pertaining to the import of components and spares from associated enterprises. The Tribunal upheld this plea, allowing the appellant's ground.8. Applicability of +/-5% Range in Computing Arm's Length Price:The appellant argued that the +/-5% range should be considered in computing the ALP. The Tribunal directed the Assessing Officer to revisit this issue in light of the amendments made by the Finance Act, 2012.9. Use of Multiple Year Data for Comparables:The appellant's plea for using multiple year data for comparables was not pressed at the time of hearing and was dismissed for non-prosecution.10. Use of Contemporaneous Data in Computing Arm's Length Price:The appellant's plea regarding the use of contemporaneous data was also not pressed at the time of hearing and was dismissed as not pressed.11. Erroneous Levy of Interest Under Section 234B:The appellant's grievance regarding the levy of interest under section 234B was not specifically addressed in the detailed analysis.12. Initiation of Penalty Proceedings Under Section 271(1)(c):The appellant's challenge to the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature.Conclusion:The Tribunal partly allowed the appeal, directing the Assessing Officer to revisit several issues, including the computation of margins, working capital adjustments, and adjustments for import expenses, while upholding the appellant's plea to restrict the transfer pricing adjustment to sales related to imports from associated enterprises. The Tribunal emphasized the need for a combined transaction approach where transactions were closely linked.