2014 (12) TMI 891 - AT - Income Tax

Tribunal directs reassessment with UK comparables & Functional Analysis Report for TDS credit & interest levy.

The Tribunal partly allowed the appeals, directing the Transfer Pricing Officer to reassess using UK comparables and conduct a detailed Functional ... Transfer pricing adjustment - profit from Indian operation taxable in India or not - automobile design and engineering services rendered to the TML - TMETC-UK sends its employees/engineers to India for rendering services – Whether the assessee was justified in carrying out comparative analysis on the basis of UK based comparables, rather than by selecting Indian comparables - Held that:- The tested party is TMETC, whose operating profit is to be bench marked by carrying out functional analysis of its controlled transactions for which reliable data for its comparability is available in the country where it is located, then such comparables has to be taken into account for carrying out the comparability analysis for the purpose of Transfer Pricing and bench marking the Arm’s Length Price - The TMETC for the purpose of rendering services in India is incurring all its cost in UK like direct costs, employee costs, legal and professional fees, rent and other operating expenses, then for the purpose of computation of PLI, these costs have to be taken into consideration for determining the profit margin. Since all the main costs attributable to the PE are based on cost incurred in UK, then it can be very well said that PE is influenced by the economic and financial conditions of UK, as against the Indian economic factors - The Indian economic factors are not at all influencing the cost or margin of the assessee, hence it cannot be held that Indian comparables can be used to bench mark the TMETC transaction and the price with Tata Motors - the finding of the TPO as well as DRP that PE is an Indian enterprise, working in India and therefore, its margin is to be bench marked with Indian comparables is not accepted - The PE in India is a service PE, having no establishment in India, nor incurring any costs, deployed any assets, therefore, cannot be held that it is an independent Indian enterprise - nothing has been brought on record that assessee’s PLI is influenced by the economic factors in India, viz, attribution of costs, assets or other factors relevant for determination of profits are based in India - Thus, the TPO and DRP were not correct in holding that UK comparables cannot be taken into consideration for the purposes of comparative analysis and bench marking the assessee’s margin - under the facts and circumstances of the case, the foreign comparables i.e. UK comparables can be taken into account for carrying out FAR analysis and bench marking the Arm’s Length margin of the assessee’s transactions with its AE and the selection of the Indian comparables by the TPO is not accepted. Since the TPO has not carried out any comparability analysis or FAR analysis in respect of UK comparables chosen by the assessee, therefore, he is directed to carry out such analysis and benchmark the assessee’s margin - If such comparables do not stand the test of comparability then, TPO may search other comparable after confronting to the assessee - for the search of comparability assessee will provide necessary assistance to the TPO – thus, the matter is remitted back to the TPO/AO for adjustment to be made – Decided partly in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment2. Selection of Comparables3. Credit of TDS4. Levy of Interest under Section 234B5. Levy of Interest under Section 234CDetailed Analysis:1. Transfer Pricing Adjustment:The primary issue revolves around the addition of Rs. 8,04,58,874 by the Transfer Pricing Officer (TPO) for the assessment year 2008-09. The TPO made this adjustment by using Indian comparables instead of foreign comparables for benchmarking international transactions. The assessee, Tata Motor European Technical Centre PLC (TMETC), argued that their benchmarking should be based on UK comparables due to their specialized automotive services, which are not comparable to Indian companies. The TPO, however, insisted on using Indian comparables, citing that the PE operates within India and should be treated akin to Indian entities. The Tribunal, referencing OECD guidelines and UN Transfer Pricing Manual, ruled that foreign comparables could be used if they provide a more accurate comparability analysis. The Tribunal directed the TPO to reassess using UK comparables and perform a detailed FAR analysis.2. Selection of Comparables:The assessee contended that the TPO's selection of seven Indian companies as comparables was flawed due to functional differences and higher profit margins. The Tribunal noted that the TPO did not perform a proper comparability analysis of the UK comparables provided by the assessee. The Tribunal emphasized that the selection of comparables should be based on the tested party's economic environment and functional profile. The Tribunal directed the TPO to re-evaluate the comparables, considering the foreign comparables provided by the assessee.3. Credit of TDS:The assessee raised an issue regarding the non-granting of credit for TDS amounting to Rs. 11,79,35,990 out of a total TDS credit of Rs. 12,06,64,360. However, this ground was not pressed by the assessee and was subsequently dismissed by the Tribunal as not pressed.4. Levy of Interest under Section 234B:The assessee challenged the levy of interest under Section 234B amounting to Rs. 1,77,76,885. The Tribunal directed the Assessing Officer to follow the decision of the Hon'ble Bombay High Court in the case of Director Of Income-tax (International Taxation) vs. NGC Network Asia, which is applicable to the facts of the case.5. Levy of Interest under Section 234C:The assessee also contested the levy of interest under Section 234C amounting to Rs. 10,878. The Tribunal directed that interest under Section 234C should be charged only on the returned income, aligning with the assessee's submission.Additional Grounds:The assessee raised additional grounds regarding the selection of functionally comparable Indian companies and the correct operating margin. However, these grounds were deemed academic in light of the Tribunal's decision on the main issue of transfer pricing adjustment.Assessment Year 2009-10:For the assessment year 2009-10, the Tribunal noted that the issue raised was similar to the one in the assessment year 2008-09. Therefore, the findings and directions given for the earlier year were applied mutatis mutandis, and the appeal was partly allowed for statistical purposes.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, directing the TPO to reassess the transfer pricing adjustment using UK comparables and perform a detailed FAR analysis. The issues regarding TDS credit and levy of interest under Sections 234B and 234C were addressed as per the Tribunal's directions.