2014 (2) TMI 36 - AT - Income Tax

Safe Harbor Margin Allowed Only If Variation Within 5% Under Section 92C; No Auto Margin Adjustments for Import Content

M/s Mobis India Limited Versus Deputy Commissioner of Income Tax

M/s Mobis India Limited Versus Deputy Commissioner of Income Tax - TMI Issues Involved:1. Transfer Pricing Adjustments2. Non-Transfer Pricing Adjustments3. Safe Harbour Provisions4. Customs Valuation as Comparable5. Adjustment for Negative Working Capital6. Adjustment for Idle Capacity7. Disallowance under Section 40(a)(i) and 40(a)(ia) for Non-Deduction of Tax at SourceDetailed Analysis:1. Transfer Pricing Adjustments:The assessee challenged the directions of the Dispute Resolution Panel (DRP) and the adjustments made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) order. The TPO rejected the assessee's transfer pricing (TP) study for not being contemporaneous and conducted a fresh analysis, selecting 14 comparables. The TPO did not accept adjustments for negative working capital and first-year operational disabilities, and determined an arm's length price (ALP) adjustment of Rs. 9,58,60,522/-. The DRP upheld the TPO's rejection of the TP study, but accepted an idle capacity adjustment of 30%. The Tribunal found that the TPO's selection of comparables with related party transactions exceeding 25% was incorrect and directed the AO to exclude such comparables and restrict the TP adjustment to the proportionate AE transactions.2. Non-Transfer Pricing Adjustments:The AO proposed additional adjustments for income from an invoice raised in the subsequent year, amortization of leasehold land, software license acquisition, and reimbursement of expenses for non-deduction of tax at source. The DRP upheld the AO's additions except for the excess depreciation claim. The Tribunal deleted the addition of Rs. 5.34 Crores for the invoice raised in the subsequent year, as the income accrued only upon raising the invoice.3. Safe Harbour Provisions:The assessee claimed the benefit of a 5% safe harbour range under proviso to Section 92C(2). The DRP denied this, citing the retrospective amendment by the Finance (No.2) Act, 2009. The Tribunal upheld the DRP's decision, referencing the Special Bench decision in IHG IT Services (India) (P.) Ltd. v. ITO.4. Customs Valuation as Comparable:The assessee argued that Customs valuations should be accepted as comparable for TP purposes. The DRP rejected this, stating that Customs rules differ from TP rules. The Tribunal agreed, noting that Customs valuations aim to prevent undervaluation, which is not comparable to TP analysis.5. Adjustment for Negative Working Capital:The assessee claimed an adjustment for negative working capital. The DRP rejected this, stating the assessee failed to demonstrate the impact. The Tribunal concurred, finding no empirical data justifying the adjustment.6. Adjustment for Idle Capacity:The DRP accepted the assessee's argument for an idle capacity adjustment of 30%. The Tribunal upheld this adjustment, noting the assessee's low capacity utilization of 5.47%.7. Disallowance under Section 40(a)(i) and 40(a)(ia) for Non-Deduction of Tax at Source:The AO disallowed payments for software licenses under Section 40(a)(i) and 40(a)(ia) for non-deduction of tax at source. The DRP upheld this. The Tribunal remitted the issue back to the AO to verify if the payments were for 'Shrink-wrapped' software or for the right to use software, and whether the sections were applicable.Conclusion:The Tribunal directed the AO to rework the TP adjustments, excluding comparables with related party transactions exceeding 25% and restricting adjustments to the proportionate AE transactions. The addition for the subsequent year's invoice was deleted, and the disallowance for software license payments was remitted for fresh consideration. The appeal was partly allowed for statistical purposes.