2016 (4) TMI 377 - AT - Income Tax

Transfer Pricing Dispute Resolved: TNMM Upheld, Depreciation Issue Remanded for Further Review

Essilor Manufacturing India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, Circle 11 (3), Bangalore

Essilor Manufacturing India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, Circle 11 (3), Bangalore - TMI Issues Involved:1. Assessment and reference to Transfer Pricing Officer (TPO) legality.2. Comparability analysis and selection of Most Appropriate Method (MAM) for Transfer Pricing.3. Use of erroneous data by AO/TPO.4. Non-allowance of appropriate adjustments by AO/TPO.5. Variation of 5% from the arithmetic mean.6. Disallowance of prior period expenses.7. Initiation of penalty proceedings.8. Relief and additional grounds.Detailed Analysis:1. Assessment and Reference to TPO Legality:The assessee challenged the legality of the assessment and reference to the TPO, arguing that the AO did not issue a show cause notice as per the proviso to section 92C(3) of the Income-tax Act, 1961. The AO also failed to record an opinion that conditions in section 92C(3) were satisfied, and the TPO did not demonstrate that the motive was to shift profits outside India. The Tribunal did not find merit in these arguments and upheld the actions of the AO/TPO.2. Comparability Analysis and Selection of MAM for Transfer Pricing:The assessee, engaged in manufacturing plastic ophthalmic lenses, used the Cost Plus Method (CPM) for benchmarking its international transactions, arguing that it was more of a job work than full-fledged manufacturing. The TPO rejected CPM and adopted the Transactional Net Margin Method (TNMM) as MAM, finding that the assessee was not a contract manufacturer but purchased raw materials and independently carried out manufacturing. The Tribunal upheld the TPO's decision, noting that the CPM was not appropriate due to variations in cost components and the nature of the assessee's business activities.3. Use of Erroneous Data by AO/TPO:The assessee contended that the AO/TPO used non-contemporaneous data and did not apply multiple-year data. The Tribunal emphasized the mandate of Rule 10B(4), which requires using current year data unless it does not reflect the correct uncontrolled comparable price. The assessee failed to demonstrate that the current year data was inadequate, leading to the dismissal of this ground.4. Non-Allowance of Appropriate Adjustments by AO/TPO:The assessee sought adjustments for differences in accounting practices, depreciation, research and development expenditure, and capacity under-utilization. The Tribunal focused on the depreciation adjustment, noting that the assessee's depreciation expenses were higher due to the straight-line method. The Tribunal remanded the issue to the TPO/AO for a comparative analysis of depreciation costs and other related expenses, directing an appropriate adjustment.5. Variation of 5% from the Arithmetic Mean:The Tribunal acknowledged this as a consequential benefit, directing the AO/TPO to consider the 5% variation depending on the outcome of the re-determination of the ALP.6. Disallowance of Prior Period Expenses:The assessee did not press this ground during the hearing, leading to its dismissal.7. Initiation of Penalty Proceedings:The Tribunal did not specifically address this issue in detail, focusing on the substantive grounds of the appeal.8. Relief and Additional Grounds:The assessee raised additional grounds, including the rejection of General Optics (Asia) Ltd. as a comparable, and claims for depreciation and capacity utilization adjustments. The Tribunal admitted the additional ground regarding General Optics, remanding the issue to the AO/TPO for examination of functional comparability. For the working capital adjustment, the Tribunal upheld the CIT(A)'s direction to the TPO, emphasizing the need for the assessee to provide relevant details and quantification.Separate Judgments:No separate judgments by different judges were mentioned; the order was delivered collectively by the Tribunal.Conclusion:The appeals of the assessee were partly allowed, and the appeal of the revenue was dismissed. The Tribunal upheld the TPO's adoption of TNMM over CPM, dismissed the use of erroneous data ground, and remanded the depreciation adjustment issue for further analysis. The Tribunal also directed consideration of the 5% variation and admitted additional grounds for further examination.