2019 (4) TMI 2110 - AT - Income Tax

Transfer pricing appeal allowed with adjustments. Methodology upheld, directions given for AE transactions, comparables, and more.

M/s. Sami Labs Limited Versus The Deputy Commissioner of Income Tax, Circle 6 (1) (1), Bangalore.

M/s. Sami Labs Limited Versus The Deputy Commissioner of Income Tax, Circle 6 (1) (1), Bangalore. - TMI Issues Involved:1. Transfer Pricing adjustment to manufacturing segment2. Rejection of Cost Plus Method and adoption of Transaction Net Margin Method3. Computation of adjustments relating to AE transactions4. Inclusion of export incentives in operating revenues5. Underutilization of manufacturing capacities and idle costs6. Application of functional similarity filter and selection of comparables7. Margin computation errors for Indfrag Limited8. Adjustments for differences in functions and risks9. Commission on guaranteeDetailed Analysis:1. Transfer Pricing Adjustment to Manufacturing Segment:The AO and TPO made a transfer pricing adjustment of Rs. 12,90,24,688/- to the prices charged by the appellant. This adjustment was contested by the appellant on multiple grounds, including the rejection of the Cost Plus Method, incorrect computation of adjustments, exclusion of export incentives, and underutilization of manufacturing capacities.2. Rejection of Cost Plus Method and Adoption of Transaction Net Margin Method:The TPO rejected the Cost Plus Method (CPM) adopted by the appellant and instead used the Transaction Net Margin Method (TNMM) for determining the Arm's Length Price (ALP). The DRP upheld this rejection. It was argued that CPM was appropriate for the appellant's transactions involving semi-finished goods. However, the DRP justified the use of TNMM due to practical difficulties in identifying direct and indirect costs, and the absence of granular details for comparables.3. Computation of Adjustments Relating to AE Transactions:The appellant argued that the TPO erred in computing adjustments relating to AE transactions, as adjustments were also made to non-AE transactions. The DRP had previously directed that adjustments should be restricted to AE transactions only. The Tribunal restored this matter to the AO/TPO to ensure compliance with this directive.4. Inclusion of Export Incentives in Operating Revenues:The appellant contended that export incentives should be included in the operating revenues for computing operating margins. The Tribunal referred to the judgment of the Hon’ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd., which held that DEPB benefits are operating revenue includable in arriving at operating profit. The Tribunal directed the AO/TPO to include export incentives in the operating profit of both the tested party and comparables, ensuring that incentives relate to the current year's turnover.5. Underutilization of Manufacturing Capacities and Idle Costs:The appellant claimed that the TPO ignored the underutilization of manufacturing capacities and the resulting idle costs while computing margins. The Tribunal referred to its previous order in the appellant's case for AY 2009-10, directing the AO/TPO to consider adjustments for idle capacity costs attributable to the year under consideration. This matter was restored to the AO/TPO for fresh consideration.6. Application of Functional Similarity Filter and Selection of Comparables:The appellant argued that the TPO erred in selecting comparables whose businesses and operations were not similar to the appellant's. The DRP did not address this issue in its decision. The Tribunal restored this matter to the DRP for fresh consideration, directing them to specifically address the selection of comparables.7. Margin Computation Errors for Indfrag Limited:The appellant pointed out that the TPO included rental income of Rs. 68 lakhs as part of the operating revenue for Indfrag Limited, which was incorrect. The DRP did not provide a decision on this issue. The Tribunal restored the matter to the DRP for fresh consideration and decision.8. Adjustments for Differences in Functions and Risks:The appellant claimed that the TPO did not make adjustments for differences in functions and risks undertaken by the appellant compared to the comparables. The Tribunal referred to its previous order for AY 2009-10, directing the AO/TPO to consider the claim for risk adjustment based on the details furnished by the appellant. This matter was restored to the AO/TPO for fresh consideration.9. Commission on Guarantee:The TPO added a notional commission on guarantees extended by the appellant to its AEs, which was contested by the appellant citing RBI guidelines prohibiting such charges. The Tribunal referred to its previous order for AY 2009-10, directing the AO/TPO to adopt an arm's length commission rate of 0.5% for corporate guarantees. The Tribunal upheld this directive for the current year as well.Conclusion:The appeal was partly allowed, with several issues being restored to the AO/TPO or DRP for fresh consideration and decision. The Tribunal provided specific directions for each issue, ensuring compliance with relevant legal precedents and principles.