2014 (9) TMI 936 - AT - Income Tax

Determination of arm s length price - TP adjustment - Profit Level indicator - Held that - TP adjustment to be made to the total income of the assessee was worked out by the Assessing Officer/TPO by taking the Operating Profit to Operating Cost as PLI instead of Operating Profit to Operating Revenue taken by the assessee as PLI. - As noted by the CIT(A) the purpose of identifying the PLI is to ensure that the comparability of the controlled transactions is objective and reference in this regard was made by him to the OECD Transfer Pricing Guidelines 2010 wherein it was explained that the denominator should be reasonably independent from controlled transactions as otherwise there would be no objective starting point. Explaining further it was observed in the OECD Transfer pricing Guidelines that when analyising a transaction consisting in the purchase of goods by a distributor from an associated enterprise for resale to independent customers one could not weigh the net profit indicator against the cost of goods sold because these costs are the controlled costs for which consistency with the arm s length principle is being tested - CIT(A) was fully justified in accepting the Operating Profit to operating Revenue as the PLI as claimed by the assessee for Transfer Pricing Analysis and not Operating Profit to Operating Cost as taken by the Assessing Officer/TPO relying on the relevant OECD Transfer Pricing Guidelines 2010 - Decided against Revenue.

Summary

Issues:
Challenge to TP adjustment based on PLI calculation method.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income-tax(Appeals) IV, Hyderabad, challenging the deletion of the TP adjustment made by the Assessing Officer/TPO. The issue revolved around the Profit Level Indicator (PLI) used in the Transfer Pricing analysis, with the assessee using Operating Profit to Operating Revenue as PLI instead of Operating Profit to Operating Cost as determined by the Assessing Officer/TPO.

The Tribunal considered the arguments of both sides and reviewed the relevant material on record. The CIT(A) accepted the Operating Profit to Operating Revenue as PLI, citing the OECD Transfer Pricing Guidelines, 2010. The Guidelines emphasized the need for an objective starting point in comparability analysis, stating that the denominator should be independent from controlled transactions to ensure objectivity. The CIT(A) noted that adopting cost as the denominator in this case would lack objectivity in comparability analysis.

The Tribunal agreed with the CIT(A) that the purpose of identifying the PLI is to ensure objective comparability of controlled transactions. Referring to the OECD Guidelines, it was highlighted that the choice of denominator should be independent from controlled transactions. In the case involving international transactions of the assessee company with its associated enterprise, the Tribunal upheld the acceptance of Operating Profit to Operating Revenue as the PLI, as per the assessee's claim, in line with the OECD Transfer Pricing Guidelines, 2010. The Revenue's appeal was dismissed as they failed to provide any substantial argument against this position during the hearing.

Ultimately, the Tribunal upheld the CIT(A)'s decision regarding the PLI calculation method, dismissing the Revenue's appeal. The order was pronounced on 19th September 2014.