Transfer Pricing: Adjustment to profit margin for
“capacity underutilization” can be made.
In choosing comparables, there cannot be a cherry picking
for deciding parameters of rejection. All comparables must
face the same test
Under Rule 10B (1)(e)(ii), an adjustment to the net
profit margin has to be made for “capacity
underutilization”. Capacity underutilization by
enterprises is an important factor affecting net profit
margin in the open market because lower capacity
utilization results in higher per unit costs, which, in
turn, results in lower profits. Of course, the fundamental
issue, so far as acceptability of such adjustments is
concerned, is reasonable accuracy embedded in the mechanism
for such adjustments, and as long as such an adjustment
mechanism can be found, no objection can be taken to the
adjustment. On facts, the CIT(A)’s approach is
reasonable and the adjustments are on a conceptually sound
basis
Transfer Pricing: TPO cannot sit in judgement on
commercial expediency. RBI approval means the payment is at
ALP. If overall TNMM analysis done, royalty cannot be
analyzed separately
The TPO is not entitled to sit on judgment on the
business and commercial expediency of the assessee in
paying royalty to its’ parent company as per the
provisions of the Act as laid down clearly by the Delhi
High Court in
EKL Appliances 345 ITR 241. It is
also noted that various Tribunals such as
DCIT vs. Sona
Okegawa Precision Forgings (ITA No. 5386/Del/2010),
Hero Motocorp (ITA No 5130/Del/2010),
ThyssenKrupp
Industries (ITA No 6460/Mum/2012),
Abhishek Auto
Industries (ITA No 1433/Del/2009) have taken a view
that RBI approval of the Royalty rates itself implies that
the payments are at Arm’s Length and hence no further
adjustment needs to be made viewed from this angle too.
Furthermore, we are of the opinion that once TNMM has been
applied to the assessee company’s transaction, it
covers under its ambit the Royalty transactions in question
too and hence separate analysis and consequent deletion of
the Royalty payments by the TPO seems erroneous. We draw
support from
Cadbury India (ITA No 7408/Mum/2010
and ITA No.7641/Mum/2010 wherein the ITAT upheld the use of
TNMM for Royalty
Transfer Pricing: No bar on reliance of private
database u/R 10D(3). Nuances of the CUP Method under Rule
10B(1)(a)(i) explained
(i) Rule 10 D(3) is only illustrative in nature and
merely describes the information required to be maintained
by the assessee under section 92D “shall be supported
by authentic documents, which may include the following
…”. The logic employed by the Transfer Pricing
Officer that since databases compiled by private entities
is not included in rule 10D (3), such databases cannot be
relied upon by the assessee is clearly fallacious inasmuch
as an item not being included in illustrative list of
required documents does not take outside the ambit of
‘acceptable document’ for the required
purposes. In any event, all that Tips Software does is to
collect the data, compile the same in easy to refer format
and make it available to the end-user of such data online.
The data is public data maintained by the customs
department at various ports. It was also open to the TPO
to, if he had any doubts, call for further information from
this database supplier and examine authenticity of the data
so furnished. His summary rejection of the data as
unreliable on a technical ground is not tenable in law
Transfer Pricing: Unaudited segmental accounts can be
relied upon for comparing profitability of controlled
transactions with uncontrolled transactions. While size is
relevant in entity level comparison, it is not relevant in
transaction level comparison within the same entity
(i) In applying the Transactional Net Margin Method
(TNMM) under Rule 10B(1)(e) it is not necessary that the
net profit computations, in the case of internal
comparables (i.e. assessee’s transactions with
independent enterprise), have to be based on the audited
books of accounts or the books of accounts regularly
maintained by the assessee. All that is necessary for the
purpose of computing arm’s length price, under TNMM
on the basis of internal comparables, is computation of net
profit margin, subject to comparability adjustments
affecting net profit margin of uncontrolled transactions,
on the same parameters for the transactions with AEs as
well as Non AEs, i.e. independent enterprises, and as long
as the net profits earned from the controlled transactions
are the same or higher than the net profits earned on
uncontrolled transactions, no ALP adjustments are
warranted. It is not at all necessary that such a
computation should be based on segmental accounts in the
books of accounts regularly maintained by the assessee and
subjected to audit
Source:Itatonline