ITAT Pune -Domestic segment cannot be regarded as a comparable for the export segment

IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH ‘A’, PUNE

ITA No. 1296/PN/10 (Asstt. Year 2006-07)

Brintons Carpets Asia P Ltd. Vs. Dy.CIT Circle 1(1) Pune       

ORDER

Per D. Karunakara Rao, AM

This is the appeal filed by the assessee against the order dt 27.09.10 for the AY 2006-07, which was passed under section 143(3) read with section 144C of the Income Tax Act, 1961 of the Act after considering the guidelines of the Dispute Resolution Panel, pune dated 30.7.10. Initially, the appeal was filed in Form no 36 inadvertently. Subsequently, considering the fact of Rule 14 of the Income tax Dispute Resolution Panel Rules 2009, the assessee filed a letter dated December 28, 2010 enclosing the correct Form no 36B and the grounds and the same are accepted for the proceedings under consideration.

2. The grounds raised by the assessee read as under:–

1. The ld. assessing officer (AO) pursuant to the directions of the Ld Dispute Resolution Panel (DRP) erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs.161,98,390 to the income of the appellant by holding that the international transaction of “Export of carpets” of the appellant does not satisfy the arm^,s length principle envisaged under the Income tax Act, 1961 (the Act).
2. The Ld.DRP/AO erred in considering the domestic segment of carpets business (domestic segment) as compared to the export segment of carpets business (export segment) for benchmarking, without appreciating the fact that the domestic segment is a controlled segment as it entails international transaction pertaining to import of raw materials from the associated enterprises and hence, non-comparable. Ld.DRP/AO ought to have considered the external uncontrolled comparables and not the internal controlled comparable for determining the arm^,s length price of the impugned international transaction.
3. The ld.DRP/AO erred in not granting an economic adjustment on account of labour unrest while conducting the comparability analysis. The Ld.DRP/AO erred in not considering the impact of labour unrest on the appellant^,s profitability from its international transactions and thereby not comparing the adjusted profitability with the external comparables.
4. On a without prejudice basis, the Ld.DRP/AO erred in disregarding the differences in the functional, asset and risk (FAR) profile of the appellant^,s export segment and the domestic segment while undertaking the benchmarking analysis. Also, the Ld.DRP/AO erred in disregarding the adjustments made by the appellant in connection with certain FAR differences between the aforesaid segments while the onus is on the Ld. AO to make reasonably accurate adjustments to eliminate the above differences.
5. The Ld.DRP/AO erred in upholding the TPO^,s stance of adjustment of 44.54% being granted, for the differences in FAR profile between the export and domestic segment, when in fact no such adjustment has been granted.
6. The Ld.DRP/AO erred in making a transfer pricing adjustment of Rs.161,983,90, without appreciating the fact that the appellant is availing tax holiday benefits u/s 108 of the Act and hence, there would not have been any untoward motive of desiring a tax advantage by manipulating transfer prices of it international transactions.
7. The Ld.DRP/AO erred in not giving cognizance to the explanatory circular issued by the CBDT which clarifies that the amendment to the proviso to sec 92C(2) is applicable in respect of assessment year 2009-10 and onwards. Thus, the Ld.DRP/AO erred in not granting the benefit of +/- 5% range as per the proviso to sec. 92C(2) as it stood before the amendment.
8. On the facts and in the circumstances of the case, the Ld.AO erred in initiating the penalty proceedings u/s 271 (1)(c)of the Act on the premise that the appellant has furnished inaccurate particulars of income without appreciating the fact that the transfer pricing adjustment so made is not in accordance with law.