2015 (12) TMI 1130 - HC - Income Tax

Computation of ALP - whether international transactions the AO/TPO is precluded from taking into consideration transactions with Non Associate Enterprises, while arriving at the ALP using the Net Transactional Margin Method (TNMM); whereas Rule 10B(1)(e) mandates the consideration of profit margins with unrelated enterprises? - Held that - The question as proposed by the revenue does not seems to arise from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNMM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondentassessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondentassessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it s sales and not restricted to the international transactions entered into by the respondentassessee with it s AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it s AEs. Thus no fault can be found with the order of the Tribunal. Revenue is unable to point out how the aforesaid finding of the Tribunal is incorrect in law in the face of the clear provisions in Chapter X of the Act. The question as framed by the revenue to our mind do not arise from the impugned order of the Tribunal as the issue raised in the proposed question is not disputed. - Decided against revenue

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2006-07.

Analysis:

1. The main issue in this case was whether the Tribunal was justified in holding that the Transfer Pricing Officer (TPO) cannot consider transactions with Non-Associate Enterprises while computing the Arm's Length Price (ALP) using the Net Transactional Margin Method (TNMM), even though Rule 10B(1)(e) mandates the consideration of profit margins with unrelated enterprises.

2. The respondent, engaged in manufacturing and export of studded precious jewelry, disclosed international transactions with its Associated Enterprises (AE) using the Cost Plus Method to determine ALP. However, the TPO rejected this method and applied TNMM, resulting in a margin of 4.79% applied to all sales, including non-AE transactions done at ALP.

3. The Dispute Resolution Panel (DRP) upheld the TPO's adjustment, leading to the final assessment order by the Assessing Officer. On appeal, the Tribunal focused on the application of the 4.79% margin across all sales by the TPO, not just international transactions with AEs. The Tribunal emphasized that transfer pricing adjustments must be made only for transactions with AEs, as per Chapter X of the Income Tax Act.

4. The revenue's proposed question of law did not align with the Tribunal's order or the method of determining ALP using TNMM. The respondent did not challenge the TNMM application or the 4.79% margin, but only the application of this margin to all sales instead of just AE transactions. The High Court found no fault with the Tribunal's decision, as Chapter X mandates adjustments only for AE transactions.

5. The Court dismissed the appeal, noting that the proposed question did not raise any substantial legal issue and did not dispute the key issue raised by the respondent. Therefore, the Tribunal's decision to restrict the ALP adjustment to transactions with AEs was upheld, and the appeal was dismissed with no costs awarded.