2017 (12) TMI 1520 - AT - Income Tax

Transfer pricing appeal decision favors assessee: key points on benchmarking, PLI, deductions, and penalty.

The appeal was partly allowed in the case involving transfer pricing adjustments and international transactions. The Tribunal upheld the aggregation ... TPA - rejection of aggregation approach adopted by the assessee for benchmarking its manufacturing activities - Held that:- While benchmarking the international transactions of assessee, wherein the assessee was engaged in manufacturing activities, then we hold that various activities are to be aggregated for determining the arm's length price of its international transactions. See aassessee's own case 2017 (12) TMI 1423 - ITAT PUNE Method to be applied as most appropriate method - whether internal comparability is to be made i.e. comparing the profitability of export to associated enterprises with domestic sales? - Held that:- The said issue was also adjudicated by the Tribunal in earlier years [2017 (12) TMI 1423 - ITAT PUNE] wherein the Tribunal held that while applying TNMM method, margins of assessee are to be compared with average margins of external comparable companies. Determination of PLI - TPO had applied net profit to cost to work out the PLI but the claim of assessee was that PLI of net profit to sales has to be applied - Held that:- As in assessee's own case for earlier year Tribunal directed the Assessing Officer to adopt the net profit to sales for determining PLI. Benefit of variation / reduction of 5% from the arithmetic mean - Held that:- The benefit of range of +/-5% is available if the variation does not exceed the said tolerance margin. International transactions of procurement support services provided to associated enterprises are to be aggregated and benchmarked along with international transactions under the manufacturing activities. Disallowance of deduction claimed under section 80IB - Held that:- The said issue is covered against the assessee by the earlier order of Tribunal and wherein, the Tribunal following the same parity of reasoning as in assessment year 2006-07 had upheld the orders of authorities below in allocating head office expenses, Director’s salary, etc to Daman unit and upheld the re-computation of deduction under section 80IB of the Act. Following the same parity of reasoning, we dismiss the ground of appeal No.7.1 raised by the assessee. Addition u/s 14A - Held that:- The assessee during the course of hearing has filed the details in respect of disallowance of expenses under section 14A of the Act at ₹ 2,80,144/- as against working filed before the Assessing Officer, copy of which is placed at page 680 of the Paper Book, under which the disallowance worked out to ₹ 19,63,021/-. On perusal of the statement filed by the assessee, we disallow sum of ₹ 19,63,021/- under Rule 8D(iii) of the Rules being disallowance to be made in view of provisions of section 14A of the Act. The assessee is cash rich company and the share capital and reserves & surplus of the said concern as on 31.03.2008 are sufficient to take care of investments made by the assessee. Consequently, no disallowance is made on account of interest expenditure under Rule 8D(ii) of the Rules by the Assessing Officer. Accordingly, the ground of appeal raised in this regard, is partly allowed. Issues Involved:1. Transfer Pricing Adjustment2. International Transaction relating to export of IC Engines3. Inappropriate comparison of profitability between 'export to Associated Enterprises (AEs)' segment and 'domestic sales' segment4. Inappropriate approach adopted by TPO in application of 'net profit to total cost' as Profit Level Indicator (PLI)5. Benefit of the variation/reduction of 5 percent from the arithmetic mean6. International Transaction relating to Procurement Support Services7. Disallowance of Deduction u/s. 80IB by the AO8. Disallowance of expenses under section 14A9. Initiation of Penalty ProceedingsDetailed Analysis:1. Transfer Pricing Adjustment:The assessee contested the adjustment of Rs. 95,51,19,000 made by the ACIT to the value of international transactions with its Associated Enterprises (AEs) concerning the export of IC engines and procurement support services. The Tribunal upheld the aggregation approach for benchmarking manufacturing activities, following the precedent set in the assessee's case for the assessment year 2007-08 and the principles laid down by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT.2. International Transaction relating to export of IC Engines:The ACIT's rejection of the external comparable companies selected by the assessee for benchmarking the manufacturing function was contested. The Tribunal directed that the margins of the assessee should be compared with the average margins of external comparable companies using the TNMM method, as decided in the earlier years.3. Inappropriate comparison of profitability between 'export to Associated Enterprises (AEs)' segment and 'domestic sales' segment:The Tribunal held that the TPO's comparison of segmental profitability between 'export to AEs' and 'domestic sales' segments was inappropriate due to differences in Functions, Assets, and Risks (FAR). The Tribunal directed that the comparison should be made with uncontrolled transactions, following the precedent set by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT.4. Inappropriate approach adopted by TPO in application of 'net profit to total cost' as Profit Level Indicator (PLI):The Tribunal directed the AO to adopt 'net profit to sales' instead of 'net profit to total cost' as the PLI for determining the arm's length price, following the reasoning in the assessee's case for the assessment year 2006-07.5. Benefit of the variation/reduction of 5 percent from the arithmetic mean:The Tribunal held that the benefit of the +/- 5% range is available if the variation does not exceed the tolerance margin, as decided in the assessment year 2007-08.6. International Transaction relating to Procurement Support Services:The Tribunal directed that international transactions of procurement support services provided to AEs should be aggregated with manufacturing activities for benchmarking, following the precedent set in the assessment year 2006-07.7. Disallowance of Deduction u/s. 80IB by the AO:The Tribunal upheld the disallowance of Rs. 3,79,144 out of the deduction u/s. 80IB by allocating a portion of Director's Expenses to the profits of the eligible Daman Unit, following the reasoning in the assessee's case for the assessment year 2006-07.8. Disallowance of expenses under section 14A:The Tribunal found no merit in the AO's disallowance of Rs. 1,50,26,000 as incurred in relation to exempt income u/s.14A. The Tribunal directed a disallowance of Rs. 19,63,021 under Rule 8D(iii) of the Rules, considering the assessee's sufficient reserves and surplus to cover investments.9. Initiation of Penalty Proceedings:The initiation of penalty proceedings under section 271(1)(c) was not specifically addressed in the detailed analysis provided.Conclusion:The appeal was partly allowed, with several issues decided in favor of the assessee based on precedents and detailed analysis of the facts and applicable legal principles. The Tribunal's directions included adopting appropriate benchmarking methods, aggregation approaches, and specific disallowances under section 14A.