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| DATE: | May 23, 2011 (Date of publication) |
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| Click here to download the judgement (haworth_transfer_pricing.pdf) |
Transfer Pricing principles on use of multi-year data, adjustment to operating profits & +/- 5% adjustment
The assessee adopted the TNMM and claimed that (i) as its operations were for a part of the year, an adjustment to the margins on account of ‘capacity utilisation’ should be made, (ii) the pre-operative expenditure should be excluded, (iii) multi-year data should be used to determine comparables, (iv) if only one comparable is left, the entire exercise should be carried out afresh and (v) even if there was only one comparable, the +/- 5% adjustment should be made. The AO & DRP rejected the claim. On appeal to the Tribunal, HELD:
(i) The rejection of comparables on the ground of non-availability of current year’s financial data is proper because under Rule 10B(4), only the current year’s financial data is relevant for determination of ALP except where it is shown that the data of the earlier two years reveals facts which could have an influence on the determination of the transfer price;
(ii) A selected comparable should be functionally comparable. A company which is majorly dealing in other segments cannot be accepted as functionally comparable;
(iii) The argument of the assessee that if there is only one comparable, the ALP cannot be determined and a fresh search of comparables should be conducted is not acceptable. There is no principle of law that if only one comparable remains, the entire exercise would fail;
(iv) The argument that expenses incurred prior to the commencement of manufacturing activity hence should be excluded from operating expenses under Rule 10B(1)(e)(i) is not acceptable because operational expenses is that which is incurred to earn that income. Expenses with nexus with revenue have to be considered as operational expenses and cannot be excluded only on the ground that the date of occurrence of the revenue is later and expenses have been incurred prior to that;
(v) The assessee’s argument that the margins have to be recomputed after claiming adjustment of capacity utilization is not acceptable. Under the TNMM, the net profit margin actually realized has to be considered and there is no room for any assumption for taking the profit margin. It is not permissible to deviate from the book results on the ground of capacity utilization. Under Rule 10B(3)(ii), there cannot be any deviation in the net profit shown in the books of account and the adjustment, if any, can be made to the same to eliminate the material affects to such differences to the extent of these adjustments are reasonably accurate. As no credible and accurate information with regard to capacity utilization was furnished, adjustment was not allowable;
(vi) The Proviso to s. 92C which gives the assessee the option to adjust the ALP by +/- 5% is applicable only where more than one price is determined by the most appropriate method. In a case where only one price is determined by the most appropriate method, the benefit of +/- 5% is not available to the assessee.
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