2016 (2) TMI 406 - HC - Income Tax

Transfer pricing adjustment - Arm s Length Price on its international transactions by adopting Cost Plus Method undertaken as the said transaction fulfils the requisite conditions as enumerated under Section 12A - Held that - The submission of the appellant that the adjustment of TPO towards Account of Management charges is arbitrary has been dealt by the First as well as the Second Appellate Authority and a concurrent finding of fact has been recorded that the TPO in principle accepted the remuneration model of 25% revenue sharing and the same has been substantiated and justified by the documents so submitted before the authorities below. Further, the genuineness of the documents which were relied on by the authorities have not been doubted by the Department. Thus, in view of the above, we do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority. Accordingly, no question of law arises out of the judgment rendered by the authorities below.

Summary

Issues:
Transfer pricing adjustment on account of Account Management charges for the assessment years 2005-06 and 2006-07.

Analysis:
The assessee filed income tax returns claiming Arm's Length Price on international transactions using the Cost Plus Method under Sections 12A and 12B. The assessing authority disallowed the claim, leading to an appeal. The First Appellate Authority found in favor of the assessee, emphasizing the compliance with transfer pricing laws and the adoption of the Cost Plus Method. The authority analyzed the revenue sharing models between the appellant and its foreign subsidiaries, highlighting the functional and risk profiles to allocate risks appropriately. The authority rejected the TPO's arbitrary remuneration model and supported the appellant's 25% revenue sharing basis. The authority also cited relevant case laws to support the decision.

The revenue department appealed to the Second Appellate Authority, which affirmed the findings of the First Appellate Authority, leading to the department's further appeal. The department raised questions regarding the TPO's adjustment on Account Management charges, alleging arbitrariness and questioning the impact of tax benefits on transfer pricing adjustments. The department also raised concerns about the risk perception of foreign clients bypassing foreign subsidiaries. However, both the First and Second Appellate Authorities had already addressed and dismissed these concerns, emphasizing the acceptance and justification of the 25% revenue sharing model by the appellant and the absence of doubts regarding the submitted documents' genuineness.

Ultimately, the High Court found no illegality or infirmity in the lower authorities' decisions, noting the concurrent findings of fact based on the records. The Court concluded that no question of law arose from the judgments, leading to the dismissal of the appeals. The Court emphasized the importance of factual findings and upheld the decisions of the lower authorities regarding the transfer pricing adjustments on Account Management charges for the relevant assessment years.