2015 (12) TMI 1076 - HC - Income Tax

Transfer pricing adjustment - Tribunal restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.) - Held that - in terms of Chapter X of the Act redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with nonAE. This adjustment is beyond the scope and ambit of Chapter X of the Act. - Decided in favour of assesee Appeal admitted on Question Nos.(b)Disallowance of payment of royalty project engineering and manufacturing drawing fees - ITAT allowed the claim and (c)Disallowance of payment of liquidated damages - ITAT allowed the claim

Summary

Issues:
1. Whether the Tribunal was justified in restricting the Transfer Pricing adjustment only to transactions between Associated Enterprises (AEs)?
2. Whether the Tribunal was justified in allowing the payment of royalty, project engineering, manufacturing drawing fees, and liquidated damages disallowed by the Transfer Pricing Officer (TPO)?

Analysis:

Issue 1:
The Respondent, engaged in turnkey contracts, had international transactions with its AEs involving various aspects. The TPO proposed an adjustment to enhance profit margins on all transactions, including those with non-AEs. The Assessing Officer followed this proposal. The Tribunal, however, held that transfer pricing adjustments should only apply to transactions with AEs, not independent third parties. This interpretation aligns with Chapter X of the Income Tax Act, which mandates adjustments only for international transactions to determine Arm's Length Price (ALP). Adjusting non-AE transactions would go beyond the Act's scope and result in increased profits for non-AE transactions. Previous court decisions also support this interpretation, emphasizing the Act's provisions on transfer pricing. As such, the issue did not raise a substantial question of law and was not entertained.

Issue 2:
The Tribunal allowed certain payments disallowed by the TPO, including royalty, project engineering fees, manufacturing drawing fees, and liquidated damages. The appeal was admitted on these issues, indicating a need for further examination. The Court directed the Registry to inform the Tribunal to keep relevant documents for the appeal. This suggests that a detailed review of the disallowed payments and their justifications will be conducted to determine the validity of the Tribunal's decision in allowing these payments. Further proceedings will focus on these specific aspects to ensure a fair and accurate resolution of the dispute.