2016 (2) TMI 874 - AT - Income Tax

Transfer pricing adjustment - computation of ALP based on interim and unaudited financial statements - Held that - We are of the considered opinion that we have to restore the entire issue of determination of ALP to the file of the A.O. for fresh adjudication in accordance with law. When audited financial statements are available in the public domain, computation of ALP based on interim and unaudited financial statements cannot be accepted. A fresh exercise has to be done based on the audited financial statements of each of the parties for all the segments/international transactions. Regarding the plea of the assessee to direct the A.O. to apply the Second Proviso to S.92(2) of the Act and to exclude comparables having related party transactions in excess of 25% and to direct the AO to grant working capital adjustment, we hold that the assessee would be free to take up any legal argument or contentions before the A.O. The law with respect to transfer pricing has developed over the period of time and the assessee/revenue should not be deprived of taking benefit of the latest legal developments on any issue. The AO is directed to consider all these fresh contentions and arguments raised by the assessee and dispose of the same and arguments in accordance with law. The AO/TPO shall afford adequate opportunity to the assessee. - Decided in favour of assessee for statistical purposes

Issues:
Transfer Pricing adjustments in international transactions for import of components, import of electrical equipment for resale, E-content and e-catalogue services, provision of research and development services, and business support services.

Analysis:

1. Transfer Pricing Adjustment for Import of Components:
The assessee made a suo moto adjustment to its total income due to adjustments in arm's length price (ALP) of Research & Development (R&D) expenses. The Transfer Pricing Officer (TPO) suggested a different adjustment, which was upheld by the First Appellate Authority. The appeal challenged this adjustment, citing errors in the selection of comparables and failure to consider audited financials. The Tribunal held that a fresh adjudication was necessary based on audited financial statements for accurate ALP determination.

2. Transfer Pricing Adjustment for Import of Electrical Equipment for Resale:
Similar to the previous issue, the adjustment for import of electrical equipment for resale was contested on grounds of using unaudited financial statements for ALP calculation. The Tribunal directed a fresh assessment based on audited financial statements and allowed the assessee to present legal arguments and contentions before the Assessing Officer (AO).

3. Transfer Pricing Adjustment for E-Content and E-Catalogue Services:
The adjustment for E-content and e-catalogue services was also challenged, highlighting errors in selecting comparables and not considering audited financials. The Tribunal directed a reevaluation based on audited financial statements and allowed the assessee to present fresh contentions before the AO.

4. Transfer Pricing Adjustment for Research and Development Services:
The adjustment for provision of research and development services was disputed, emphasizing errors in selecting comparables and not allowing the benefit of the +/- 5% range. The Tribunal directed a reassessment based on audited financial statements and instructed the AO to consider all legal arguments raised by the assessee.

5. Transfer Pricing Adjustment for Business Support Services:
The adjustment for business support services was contested, focusing on errors in considering audited financials and not allowing the benefit of the +/- 5% range. The Tribunal directed a fresh assessment based on audited financial statements and allowed the assessee to present additional legal arguments before the AO.

6. Miscellaneous Issues:
Other contentions included the failure to grant working capital adjustment, the need for risk adjustment due to the nature of compensation, and disregarding the ALP determined by the appellant. The Tribunal directed the AO to consider all fresh contentions and arguments raised by the assessee and dispose of them in accordance with the law.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes and directed a comprehensive reassessment of the Transfer Pricing adjustments based on audited financial statements and consideration of all legal arguments presented by the assessee.

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