2015 (4) TMI 1107 - HC - Income Tax

Transfer pricing adjustments - Held that - Appeal admitted on the following three substantial questions of law (1) Whether on the facts and circumstances of the case and in law the Hon ble ITAT is justified in holding that the Transfer Pricing Officer ought to have confined himself to transfer pricing adjustments to the international AE transactions only instead at entity level without appreciating that the assessee had not furnished segmental audited accounts before the Transfer Pricing Officer ? (2) Whether on the facts and circumstances of the case and in law the Hon ble ITAT is justified in restricting the adjustment only on international transactions without appreciating that (a) the assessee had applied TNMM at entity level to justify its controlled transactions on the basis of overall margins and (b) the presumption underlying arm s length principle is that uncontrolled transactions are at arm s length and therefore if the overall margins are less than arm s length margins the short fall must be on account of AE transactions only and not on pro rata basis ? (3) Whether on the facts and circumstances of the case and in law the Hon ble ITAT is justified in deleting the addition of 1, 29, 55, 813/- holding that the adjustment is within /- 5% as the ITAT has wrongly worked out adjustment on sales whereas the TPO had benchmarked the purchase transactions and had worked out the adjustment on purchases. Therefore despite the transactions being not at arm s length the assessee has got away without any adjustment.?

Summary

Issues:
1. Whether the Transfer Pricing Officer should have confined adjustments to international transactions only?
2. Whether the adjustment should be restricted to international transactions based on TNMM at entity level?
3. Whether the deletion of a specific addition by the ITAT was justified?

Analysis:

1. The High Court found that the appeal raised substantial questions of law regarding the Transfer Pricing Officer's scope of adjustments. The first issue questioned whether the Officer should have limited adjustments to international transactions only, considering the absence of segmental audited accounts before him. The Court highlighted the importance of this aspect in determining the justification of the Officer's actions.

2. The second issue focused on whether the adjustment should be restricted to international transactions based on the Transactional Net Margin Method (TNMM) at entity level. The Court examined the application of TNMM by the assessee to justify controlled transactions using overall margins. It also discussed the presumption underlying the arm's length principle and the implications of overall margins being less than arm's length margins.

3. The third issue addressed the deletion of a specific addition by the ITAT, amounting to Rs. 1,29,55,813. The Court deliberated on the ITAT's reasoning for deleting the addition, citing that the adjustment was within +/- 5%. It noted discrepancies in the calculation methodology between the ITAT and the Transfer Pricing Officer, emphasizing the need for accurate assessments in such matters.

In conclusion, the High Court admitted the appeal based on the substantial questions of law raised by the appellant. The Court directed the Registrar to summon the original record from the Tribunal for inspection and emphasized the importance of compliance with procedural rules in preparing the paper book. The judgment provided detailed analysis on each issue, ensuring a comprehensive review of the Transfer Pricing Officer's actions and the ITAT's decision regarding adjustments in the case.