2011 (7) TMI 508 - AT - Income Tax

Addition - Arm s length price - the assessee is dependent contractor - As submitted by the assessee s counsel the assessee is a new entrant in the field and came into business in March 2000 and being so the assessee is not in a position to charge at 22 USD per man hour as that of M/s WIPRON is charging. M/s WIPRO is a large industrial giant undertaking working independently with principles to principle relationship. On the other hand the assessee is dependent contractor - The assessee has also stated before us that the billing rate changes depending upon the various factors as enumerated in the report of NASCOM which has been filed by the assessee before the CIT(A) and not considered the same as being additional evidence - If the Assessing Officer is unable to bring on record the comparable case the Assessing Officer is at liberty to consider the rate adopted by the assessee immediate next year and thereafter he is required to discount the same after considering the inflationary rate - Once he arrived at the discounted rate there is no question of further giving any deduction towards any adjustments at 5% - Accordingly direct the Assessing Officer to follow the CUP method as adopted by the assessee itself in this assessment year - However he has to re-determine the TPO as per the above directions.

Summary

Issues:
1. Dispute over arm's length consideration for international transactions.
2. Admissibility of additional evidence by the CIT(A).
3. Disagreement on the rate adopted for payment to M/s WIPRO Ltd.
4. Application of Transactional Net Margin Method (TNM) and Comparable Uncontrolled Price (CUP) method.

Issue 1: Dispute over Arm's Length Consideration:
The Transfer Pricing Officer (TPO) under section 92CA(3) of the Income Tax Act analyzed international transactions of the assessee with an associate enterprise in the USA. The TPO found that the payments made by the USA Company to the assessee were not at arm's length, as they were significantly lower than the payments made to another Indian company. The TPO fixed a reasonable rate of USD 18 per man hour, resulting in a pricing difference of Rs. 4,64,98,586. The Assessing Officer adopted this value as the assessee's income. The CIT(A) allowed a 5% deduction but rejected additional evidence presented by the assessee, citing lack of justification. The Tribunal ruled that the comparison with the other Indian company was not valid due to differences in business nature and advised the Assessing Officer to determine a comparable case or consider the rate adopted by the assessee in subsequent years.

Issue 2: Admissibility of Additional Evidence:
The assessee sought to introduce additional evidence before the CIT(A), which was rejected on the grounds that it did not meet the conditions of Rule 46A. The Tribunal agreed with the CIT(A) that the provisions for admitting additional evidence are not meant to allow an unsuccessful party to strengthen its case. The Tribunal emphasized that the power to admit additional evidence should be used cautiously and sparingly to serve the interests of justice. The Tribunal directed the Assessing Officer to follow the CUP method as adopted by the assessee and re-determine the Transfer Pricing Officer's assessment based on this method.

Issue 3: Disagreement on Payment Rate to M/s WIPRO Ltd.:
The Revenue appealed the CIT(A)'s decision to grant relief at 5% despite confirming the rate of USD 18 per man hour set by the Assessing Officer. The Tribunal found that the comparison with the rate paid to M/s WIPRO Ltd. was not justified due to differences in business structures and relationships. The Tribunal directed the Assessing Officer to consider the rate adopted by the assessee in subsequent years and adjust it for inflation, without granting any further deductions.

Issue 4: Application of TNM and CUP Methods:
During the appeal, the assessee's counsel argued for the application of the Transactional Net Margin Method, similar to subsequent years. The Departmental Representative contested this, stating that the facts of subsequent years were not on record for comparison. The Tribunal ruled that the comparison with M/s WIPRO Ltd. was not feasible due to differing business models. It directed the Assessing Officer to use the CUP method as adopted by the assessee and re-determine the Transfer Pricing Officer's assessment accordingly.

In conclusion, the Tribunal allowed both the assessee's and the Revenue's appeals for statistical purposes, directing the Assessing Officer to re-evaluate the Transfer Pricing Officer's assessment using the CUP method and considering the rate adopted by the assessee in subsequent years.