2014 (12) TMI 11 - HC - Income Tax

Determination of ALP Re-computation of disallowance - material brought on record by TPO considered by CIT(A) or not Held that - The Tribunal was rightly of the view that while making a comparison of the operating profit with other comparables, the TPO is required to compute the operating profit by applying the same formula - He has no jurisdiction to apply a different formula to work out the operating profit for the comparables and for the assessee there was no infirmity in the directions given by the CIT(A) to the AO to re-compute the disallowance based on similar status of comparables either with export incentives or without export incentives - the order of the AO u/s 251/143(3) notes that after the order of the CIT(A) dated 30 January 2012 directing the TPO to compute the Arm s Length Price, the TPO agreed with the opinion of the CIT(A) and by a letter dated 18 November 2013 stated that the correct Arm s Length Price would have to be computed by treating the case of the assessee and comparable instances on the same footing by according the same treatment to export incentives - the international transaction of the assessee was considered to reflect the Arm s Length Price The order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Upholding the decision of CIT(A) without considering the material brought on record by the Transfer Pricing Officer for determining the Arm's Length Price.
2. Upholding the decision of CIT(A) in giving direction to the Assessing Officer to re-compute the disallowance.

Analysis:
1. The case involves an appeal by the revenue under section 260-A of the Income Tax Act, 1961 regarding a decision of the Income Tax Appellate Tribunal related to the Assessment Year 2008-09. The primary issue raised by the Revenue was whether the ITAT was justified in upholding the decision of CIT(A) without considering the material presented by the Transfer Pricing Officer for determining the Arm's Length Price. The assessee had an associate company, and the total value of export sales to the associated enterprise exceeded Rs. 5 crores. The Transfer Pricing Officer made adjustments of Rs. 12,97,33,913 based on the operating profit margin differences between the assessee and comparable instances. The CIT(A) directed the Assessing Officer to recompute the disallowance based on the same parameters adopted for comparables, either with or without export incentives. The Tribunal affirmed this decision, emphasizing the need for consistency in computing operating profit for comparables and the assessee. The order of the CIT(A) was duly implemented by the Assistant Commissioner of Income Tax, rendering the appeal moot.

2. The second issue pertains to the direction given by the CIT(A) to the Assessing Officer to re-compute the disallowance. The CIT(A) observed discrepancies in the operating margin calculations by the TPO and directed a reevaluation based on consistent parameters for comparables and the assessee. The Tribunal upheld this direction, emphasizing the necessity of applying the same formula for computing operating profit. The order of the CIT(A) was implemented by the Assistant Commissioner of Income Tax, leading to the computation of the revised income of the assessee. As a result, the appeal was dismissed as the order of the CIT(A) had been effectively executed, and no substantial question of law remained unresolved.

In conclusion, the judgment highlights the importance of consistency in determining the Arm's Length Price and computing disallowances concerning transfer pricing issues. The decision underscores the need for uniformity in applying formulas and parameters for assessing operating profit margins, ensuring fair treatment across comparable instances and the assessee.