2016 (1) TMI 1199 - HC - Income Tax

Reference to the Transfer Pricing Officer(TPO) - ascertain the correct Arm Length Price(ALP) of the transactions - grievance of the Revenue before us is that the Tribunal could not have restricted the application of the ALP only to International Transaction entered into by the Respondent- Assessee with its A.E. - Held that - Grievance of the Revenue is no longer res integra, as this Court has in CIT v/s M/s Tara Jewels Exports Pvt Ltd 2015 (12) TMI 1130 - BOMBAY HIGH COURT and CIT v/s Thyssen Krupp Industries India Pvt Ltd 2015 (12) TMI 1076 - BOMBAY HIGH COURT has taken a view that the ALP adjustment arrived at is only to be restricted to the international transaction entered into by the Respondent and could not apply to transactions entered into with non-A.E. This is for the reason that in terms of Chapter-X of the Act the mandate is to redetermine the consideration only with regard to International transaction with A. E. We find that the impugned order has merely laid down the principles to be applied for the purposes of transfer pricing adjustment by restricting the same only to the international transactions entered into with the A. E. No fault can be found with the impugned order of the Tribunal in restoring the issues to the Assessing Officer for fresh consideration after laying down the parameters of its consideration. Accordingly, Question No.(A) as formulated does not give rise to any substantial question of law Appeal is admitted on substantial Question No.(B) - Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that AO/TPO were not justified in excluding gain on foreign exchange fluctuation from the total revenues for the purpose of computing OP/OC?

Summary

Issues:
1. Whether the Tribunal was justified in determining the eligibility of export turnover as an international transaction?
2. Whether the Tribunal was justified in excluding gain on foreign exchange fluctuation for computing OP/OC?

Issue 1 Analysis:
The Respondent Assessee, engaged in diamond trading, had international transactions with Associated Enterprises (AE) in the U.S.A. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the transactions. The TPO increased the consideration for international transactions to achieve an ALP operating margin of 7.32%. The Assessing Officer finalized the assessment based on the TPO's findings. The Tribunal, in its order, accepted the 7.32% operating margin but limited the ALP adjustment to international transactions with A.E. only. The Revenue contended that the ALP should apply to all transactions, not just international ones. However, previous court decisions supported restricting ALP adjustments to international transactions with A.E. only. The Revenue also argued that it was impossible to separate transactions with A.E. from non-A.E., but subsequent orders showed this was not an issue raised before the Tribunal and could not be considered. The Tribunal's order was found to be correct in directing the Assessing Officer to consider ALP adjustments only for international transactions with A.E.

Issue 2 Analysis:
The second issue involved the Tribunal's decision to exclude gain on foreign exchange fluctuation from total revenues when computing Operating Profit/Operating Costs (OP/OC). This issue was admitted for further consideration, and the Tribunal's decision on this matter was yet to be analyzed and determined by the High Court.

In conclusion, the High Court's judgment addressed the first issue comprehensively, explaining the rationale behind limiting ALP adjustments to international transactions with A.E. only. The second issue regarding the exclusion of gain on foreign exchange fluctuation for OP/OC computation was accepted for further review. The judgment highlighted the importance of following precedents and legal principles in transfer pricing matters.