Executive summary
The Mumbai bench of the Income Tax Appellate Tribunal („the Tribunal‟) recently pronounced its ruling in case of Phoenix Mecano (India) Limited („the taxpayer‟), wherein the Tribunal held the following:
The transfer pricing adjustments should be restricted only to the international transactions and not to the entire turnover of the taxpayer
Merely because there is TP adjustment, entire books cannot be rejected in the absence of any defects
Benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act be allowed to the taxpayer even in case where the difference in value of international transactions and its arm‟s length price („ALP‟) was more than 5% range.
Facts
The taxpayer, during the Assessment Year („AY‟) 2007-08,had entered into transactions with its Associated Enterprises („AE‟).
During the assessment proceedings, the Transfer Pricing Officer („TPO‟) had applied the Transactional Net Margin Method („TNMM‟) as the Most Appropriate Method („MAM‟) to benchmark the international transactions and proposed adjustments to the tune of Rs 85,270,976. In addition to the transfer pricing adjustment, the Assessing Officer (AO) had proposed an addition on account of the fall in gross profit ratio („GP ratio‟) for AY 2007-08 to 21.33% from 26.63% in the immediately preceding year. The taxpayer had attributed the following reasons for the dip in GP ratio:-
Establishment of a new plant in 2006 resulting in an increase in sale but with corresponding increase in cost of materials, and increase in manufacturing, administrative, financial expenses etc.
Change in the proportion of trading and manufacturing activities in the business of the taxpayer;
Increase in material cost driven by the fluctuation in exchange rate of EURO; and
Lower capacity utilization.
The AO rejected the above arguments of the taxpayer due to the absence of concrete evidence furnished by the taxpayer and held that the taxpayer had manipulated its profits. The AO rejected the books of accounts and considered the GP ratio of the preceding year and made a further addition of Rs. 8,113,911 to the total income. Aggrieved, the taxpayer filed an appeal before the Dispute Resolution Panel (DRP). The DRP confirmed the order of the AO and hence the taxpayer filed an appeal before the Tribunal.
Issues before the Tribunal
Whether adjustment should be restricted only to the international transactions or can be extended to the entire turnover of the taxpayer?
Are the books of accounts liable to be rejected if there is a transfer pricing adjustment?
Prior to 1.10.2009, is the benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act available to the taxpayer
Ruling of the Tribunal
Placing reliance in the case of Starlite and various other decisions, the Tribunal held that the adjustments should be restricted only to the international transactions with the AEs and not to the entire turnover.
Benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act be allowed to the taxpayer even in case where the difference in value of international transactions and its arm's length price ('ALP') was more than 5% range.
In relation to international transactions with the AE, there is provision for separate TP adjustments, and due to a mere existence of TP adjustment, entire books could not be rejected in the absence of any defects.
The matter was restored back to the AO for fresh adjudication.
Conclusion
This ruling reiterated the existing positions that adjustments should be restricted only to the international transactions of the taxpayer as against the whole entity approach. Further, it also held that any transfer pricing adjustment should not automatically lead the tax authorities to reject the books of accounts unless specific defects are noted.
Source: Phoenix Mecano (India) Ltd vs.Deputy Commissioner of Income Tax, Mumbai for AY 2007-08, ITA No.7646/Mum/2011
The Mumbai bench of the Income Tax Appellate Tribunal („the Tribunal‟) recently pronounced its ruling in case of Phoenix Mecano (India) Limited („the taxpayer‟), wherein the Tribunal held the following:
The transfer pricing adjustments should be restricted only to the international transactions and not to the entire turnover of the taxpayer
Merely because there is TP adjustment, entire books cannot be rejected in the absence of any defects
Benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act be allowed to the taxpayer even in case where the difference in value of international transactions and its arm‟s length price („ALP‟) was more than 5% range.
Facts
The taxpayer, during the Assessment Year („AY‟) 2007-08,had entered into transactions with its Associated Enterprises („AE‟).
During the assessment proceedings, the Transfer Pricing Officer („TPO‟) had applied the Transactional Net Margin Method („TNMM‟) as the Most Appropriate Method („MAM‟) to benchmark the international transactions and proposed adjustments to the tune of Rs 85,270,976. In addition to the transfer pricing adjustment, the Assessing Officer (AO) had proposed an addition on account of the fall in gross profit ratio („GP ratio‟) for AY 2007-08 to 21.33% from 26.63% in the immediately preceding year. The taxpayer had attributed the following reasons for the dip in GP ratio:-
Establishment of a new plant in 2006 resulting in an increase in sale but with corresponding increase in cost of materials, and increase in manufacturing, administrative, financial expenses etc.
Change in the proportion of trading and manufacturing activities in the business of the taxpayer;
Increase in material cost driven by the fluctuation in exchange rate of EURO; and
Lower capacity utilization.
The AO rejected the above arguments of the taxpayer due to the absence of concrete evidence furnished by the taxpayer and held that the taxpayer had manipulated its profits. The AO rejected the books of accounts and considered the GP ratio of the preceding year and made a further addition of Rs. 8,113,911 to the total income. Aggrieved, the taxpayer filed an appeal before the Dispute Resolution Panel (DRP). The DRP confirmed the order of the AO and hence the taxpayer filed an appeal before the Tribunal.
Issues before the Tribunal
Whether adjustment should be restricted only to the international transactions or can be extended to the entire turnover of the taxpayer?
Are the books of accounts liable to be rejected if there is a transfer pricing adjustment?
Prior to 1.10.2009, is the benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act available to the taxpayer
Ruling of the Tribunal
Placing reliance in the case of Starlite and various other decisions, the Tribunal held that the adjustments should be restricted only to the international transactions with the AEs and not to the entire turnover.
Benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act be allowed to the taxpayer even in case where the difference in value of international transactions and its arm's length price ('ALP') was more than 5% range.
In relation to international transactions with the AE, there is provision for separate TP adjustments, and due to a mere existence of TP adjustment, entire books could not be rejected in the absence of any defects.
The matter was restored back to the AO for fresh adjudication.
Conclusion
This ruling reiterated the existing positions that adjustments should be restricted only to the international transactions of the taxpayer as against the whole entity approach. Further, it also held that any transfer pricing adjustment should not automatically lead the tax authorities to reject the books of accounts unless specific defects are noted.
Source: Phoenix Mecano (India) Ltd vs.Deputy Commissioner of Income Tax, Mumbai for AY 2007-08, ITA No.7646/Mum/2011
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