2012 (1) TMI 60 - ITAT PUNE

Transfer Pricing – adjustment in ALP – Working Capital Adjustment to the unadjusted margins of the comparable companies – Held that:- Working capital is a factor which influence the price in the open market and constitutes a subject matter for adjustments in the matters relating to ALP in Transfer Pricing. It is the duty of the TPO to apply the provisions of rule 10B(1)(e). Net profit margin arising out of the comparable uncontrolled transactions should be adjusted to take into account differences, if any between the international transactions and filtered comparables of uncontrolled transactions or enterprises entering into such transactions, which could materially affect the amount of the net profit margin in the open market. Therefore, working capital adjustment is to be allowed while determining the Arm's Length operating Margin of the Comparables.

Non granting of adjustments related to import expenses – Held that:- No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. Therefore, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any.

Applicability of proviso to section 92C(2) – Held that:- Tribunal in case of Cummins India LTD vs CIT (2011 - TMI - 207660 - ITAT PUNE) has decided in favor of the assessee in support of grant of deduction of 5%, when multiple prices in establishing the arithmetic mean are involved. Thus the assessee's ground on this issue is allowed.

Incorrect computation of TP adjustment on the entire manufacturing segment sales instead of computing it sales relatable to the import of the components and spares procured from the AEs only – principle of proportionality - Held that:- TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost.

Issues related to International transaction pertaining to export of components and spares, short grant of TDS/SA and charging of interest u/s 234B and 234C of the Act – Held that:- Matters are remitted back to file of A.O. to grant necessary relief.

Issues being decided in favor of assessee for statistical purpose. We remand these grounds with the direction to the AO to rework the addition.