2014 (11) TMI 1036 - AT - Income Tax

Transfer pricing adjustment - determination of purchases - Held that - We accept the first fold of submission made by the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE. However, this exercise be carried out after verifying the details of purchases available of the TP study report. The Assessing Officer first determine the purchase of raw material and components from the AE and then determine the ALP having regard to the mean profit margin of comparable cases at 8.26%. Entitlement for the benefit of proviso appended to section 92C(2) - Held that - As far as the second fold of submission is concerned, we remit this issue to the file of the Assessing Officer for re-adjudication. The learned Assessing Officer, after determination of any adjustment, if required to the value of the international transactions shall determine, whether the assessee is entitled for the benefit of proviso appended to section 92C(2). Since the learned TPO granted this benefit to the assessee with regard to the automotive component segment, it cannot be denied qua, this claim also, if the adjustment falls within the range provided in the proviso. The Assessing Officer shall look into these aspects and if so require can take the help of the TPO.

Summary

Issues Involved:
1. Adjustment in the Arm's Length Price (ALP) of international transactions.
2. Application of the benefit of section 92C(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Adjustment in the Arm's Length Price (ALP) of international transactions:

The primary issue in the appeal was the adjustment of Rs. 2,10,95,333/- made by the Assessing Officer (A.O.) to the ALP of international transactions entered with Associated Enterprises (AEs). The assessee, engaged in the manufacture and sale of textile machinery and related parts, had its case selected for scrutiny, leading to a reference to the Transfer Pricing Officer (TPO) for determining the ALP of international transactions. The TPO identified two segments: auto component and textile machinery. While no adjustment was recommended for the auto component segment, the textile machinery segment showed a discrepancy. The TPO initially computed a higher ALP based on an arithmetic mean margin of 13.32%, which was later corrected to 8.26% after the assessee filed an application under section 154 of the Income Tax Act. The revised adjustment resulted in a shortfall of Rs. 2,10,95,333/-.

The assessee contended that the TPO's methodology was flawed as it applied the ALP adjustment to the total cost, including purchases from unrelated parties. The correct approach, according to the assessee, should restrict the adjustment to the purchases made from the AE, amounting to Rs. 9,75,04,096/-. The Tribunal agreed with this contention, citing the order of the ITAT in the case of Polartech India (P) Ltd. v. Asstt. CIT, which supported the view that adjustments should be confined to the value of transactions with AEs. The Tribunal directed the A.O. to verify the details and confine the adjustment to the purchases made from the AE.

2. Application of the benefit of section 92C(2) of the Income Tax Act, 1961:

The second issue was whether the benefit of the second proviso to section 92C(2) should be granted to the assessee. The proviso allows for a range of (+-) 5% around the ALP without making adjustments. The assessee argued that the TPO failed to provide this benefit in the textile machinery segment, despite granting it in the automotive component segment. The Tribunal noted that the assessee had disclosed segmental details in its TP study report, which the TPO had acknowledged. The Tribunal remitted this issue back to the A.O. for re-adjudication, instructing that if the adjustment falls within the 5% range, the benefit should not be denied. The A.O. was directed to determine any required adjustment and then assess the applicability of the proviso.

Conclusion:

The appeal was allowed for statistical purposes. The Tribunal directed the A.O. to confine the ALP adjustment to the purchases made from the AE and to re-examine the applicability of the benefit under section 92C(2). The A.O. was advised to take the help of the TPO if necessary and to ensure that the benefit provided in the automotive component segment is also considered for the textile machinery segment if applicable.