2015 (10) TMI 1379 - AT - Income Tax

Transfer pricing adjustment - upward adjustment made u/s.92CA(3) - TPO re-calculated the arithmetic mean of comparables to 16.70% - non provide the list of comparables considered for final determination of the ALP to assessee - Held that - We find that the objections raised by the assessee are valid. The assessee has not been provided with the list of comparables considered for final determination of the ALP. Even the objections of the assessee with respect to the business activities of the comparables have not been addressed. Thus, the principles of natural justice and fair play have been violated. The impugned order is set aside, the file is remitted back to the Assessing Officer with a direction to re-determine ALP after adopting external comparables and suitable method to determine ALP of the transactions with the AE. Needless to say that, while determining ALP, the Assessing Officer shall only take into consideration the international transactions with AE and not the transactions with un-related parties. The Assessing Officer shall grant reasonable opportunity of hearing to the assessee and thereafter, pass denovo assessment order in accordance with law. - Decided in favour of assessee for statistical purposes.

Issues Involved:
- Upward adjustment made under section 92CA(3) of the Income-tax Act, 1961.
- Validity of the method adopted by the assessee in determining Arm's Length Price (ALP).
- Failure to provide the list of comparables considered by the Transfer Pricing Officer (TPO).
- Alleged violation of principles of natural justice and fair play.

Analysis:
1. Upward Adjustment under Section 92CA(3): The appeal was filed by the assessee challenging the Commissioner of Income Tax (Appeals) order confirming an upward adjustment of Rs. 2.10 Crores made under section 92CA(3) of the Income Tax Act, 1961. The adjustment related to international transactions of the assessee with its Associated Enterprises (AE). The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) using the Transaction Net Margin Method (TNMM), resulting in the said adjustment.

2. Validity of Method Adopted for ALP: The assessee had adopted the cost plus method with a markup cost of 15% to determine the ALP. However, the TPO rejected the method and documents provided by the assessee. The TPO selected comparables and calculated the ALP using TNMM, leading to the upward adjustment. The assessee contended that the CIT(Appeals) erred in not considering the method adopted by the appellant and determining the ALP under TNMM.

3. Failure to Provide List of Comparables: The assessee raised concerns regarding the lack of disclosure of the final list of companies considered by the TPO to determine the ALP. The nature of business of the assessee was deemed different from that of the comparables selected by the TPO. This lack of transparency and failure to address objections regarding comparables' business activities led to a violation of natural justice and fair play.

4. Violation of Principles of Natural Justice: The Tribunal found merit in the objections raised by the assessee regarding the lack of disclosure of the list of comparables and the failure to address concerns about the comparables' business activities. Consequently, the impugned order was set aside, and the case was remitted back to the Assessing Officer to re-determine the ALP using external comparables and a suitable method. The Assessing Officer was directed to consider only the international transactions with AE and grant a reasonable opportunity of hearing to the assessee for a denovo assessment order.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, emphasizing the importance of transparency, adherence to natural justice principles, and fair play in transfer pricing assessments.

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