2015 (1) TMI 94 - AT - Income Tax

Transfer pricing adjustments - Determination of arm s length price - Held that - It is well settled legal position that the ALP adjustments can only be made in respect of international transactions with the AEs and cannot extend to the transactions with non AEs. There are large number decisions of the coordinate benches, including in the case of Alstom Projects India Ltd Vs ACIT 2013 (8) TMI 442 - ITAT MUMBAI , holding so. In the case of CIT Vs Stratex Networks India Pvt Ltd (2013 (5) TMI 277 - DELHI HIGH COURT), Hon ble jurisdictional High Court has also accepted this position. Learned Departmental Representative, even as vehemently relying upon the stand of the TPO, does not dispute this legal position but he contends that the factual elements embedded in this contention, at least on computation aspect, need to be verified by the TPO. That is only arithmetical part giving effect to this principle. We see no harm in this exercise. - it fit and proper to uphold the stand of the CIT(A) in principle but remit the matter for the limited purposes of verifying the computation of excluding transactions with non- AEs in calculating the ALP required to be made under the TNMM method. To this extent, the matter is restored to the file of the TPO. - Decided in favour of Revenue.

Summary

Issues:
- Whether the international transactions entered into by the assessee are at arm's length.
- Whether the addition made by the Assessing Officer on account of transfer pricing adjustments is valid.

Analysis:
1. The appeal concerns an order passed by the CIT(A) regarding assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2003-04. The Assessing Officer's grievance was that the CIT(A) erred in concluding that the international transactions entered into by the assessee were at arm's length and in deleting the addition made on account of transfer pricing adjustments.

2. The assessee, a subsidiary of Alactel France, was engaged in manufacturing, distribution of telecom equipment, and services. The business had various segments, with some dealing only with associated enterprises (AEs) and others with non-AEs. The dispute arose regarding the profitability of non-AE segments in the application of the Transactional Net Margin Method (TNMM). The CIT(A) restricted TNMM application to transactions with AEs only, leading to the deletion of a substantial amount added by the Assessing Officer.

3. The Tribunal noted that ALP adjustments can only be made for international transactions with AEs and not extend to transactions with non-AEs, citing established legal precedents. While upholding the CIT(A)'s stand in principle, the Tribunal remitted the matter back to the Transfer Pricing Officer (TPO) for verifying the computation of excluding non-AE transactions in calculating the ALP under the TNMM method. This verification was deemed necessary for the arithmetical accuracy of the principle upheld.

4. The Tribunal's decision was based on the legal position that ALP adjustments should be limited to transactions with AEs, as supported by previous judgments. The matter was remitted to the TPO for verification purposes only, ensuring that the exclusion of non-AE transactions in the ALP calculation under TNMM was correctly implemented. The appeal was allowed for statistical purposes, and the case was remanded to the TPO for further examination and verification, maintaining the legal principle while ensuring accurate computation.