2019 (4) TMI 1786 - AT - Income Tax

Rejection of Foreign/Associated Enterprises (AEs) as tested party - whether the foreign/Associated Enterprise(s) can be considered as tested party or only the Indian entity which has recorded the transaction in its books of account can be so considered? - HELD THAT - No exception can be taken to the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as a tested parties. Notwithstanding the above legal position even if we presume for a moment on a hypothetical basis that the stand of the assessee of having foreign/AEs as a tested party is correct the assessee still cannot be said to have successfully established the particulars of the so called seven foreign/AEs simultaneously as tested party. Not only the assessee failed to furnish the basic information of the foreign/AEs such as Annual Reports and Financial statements etc. the assessee categorically admitted before the TPO that these foreign/AEs were engaged in many activities other than supply of material to the assessee. Similar is the position of foreign comparables chosen by the assessee qua each of the seven foreign/AEs. It is trite that if an assessee has chosen a comparable onus is on him to prove that the said company is comparable to the international transaction. We find that the assessee chose certain foreign companies as comparable but on being called upon by the TPO failed to lead any evidence to show that they were comparable. Ergo we accord our imprimatur to the view canvassed by the lower authorities on this issue. Non granting appropriate adjustment on account of higher depreciation claimed by it vis- -vis the comparables - HELD THAT - DRP has recorded a categorical finding that the assessee could not lead any evidence showing difference in the rates of depreciation charged by it vis- -vis the comparables. Per contra the ld. AR has placed on record a chart showing difference in the rates of depreciation charged by the assessee and comparables. We find that the authorities below did not have any occasion to consider this chart as the same has been placed before us for the first time. Ends of justice would meet adequately if we set aside the impugned order to this extent and send the matter back to the file of the AO/TPO for allowing adjustment to the operating profit margin of the comparable companies if there is some difference in rates of depreciation charged by the assessee vis- -vis these companies. The amount of depreciation of the comparable companies on their assets shall be recomputed under straight line method alone as per the rates at which the assessee has provided depreciation. To clarify if the comparables have charged depreciation at a higher rate in comparison with the assessee on some of its assets then suitable reduction should be made in the amount of their depreciation and if the comparable companies have charged depreciation at a lower rate in comparison with the assessee then suitable increase should be made to their amount of depreciation - if the assessee as well as the comparable companies are using the SLM and there is some difference in the rates of depreciation charged by them vis- -vis the assessee then suitable adjustment should be made to the profits of the comparables. Transfer pricing adjustment only to the international transactions and not to the entity level - HELD THAT - No exception can be taken to the decision of the DRP in directing that the transfer pricing addition should be restricted only to the international transactions and not the non-international transactions of the assessee. First subsection of section 92 of the Act which is the first section of the Chapter X provides in unambiguous terms that - Any income arising from an international transaction shall be computed having regard to the arm s length price . The Chapter extends in its application only to the international transactions which term has been defined in section 92B to mean a transaction between two or more associated enterprises . Thus it is patent that the transfer pricing provisions apply only to the transactions between the associated enterprises and not unrelated or non-associated enterprises. Hon ble jurisdictional High Court in CIT Vs. Tara Jewels Exports Pvt. Ltd. 2015 (12) TMI 1130 - BOMBAY HIGH COURT has held that sections 92A and 92B require Transfer Pricing adjustment to be done only in respect of the transactions entered into between the assessee with its AEs and not with the non-AEs. Transfer pricing addition by the AO in respect of the international transaction of Import of trading goods on the direction of the DRP for applying the Resale Price Method (RPM) for benchmarking the international transaction - HELD THAT - The assessee admittedly imported steel cord from its AEs and sold the same to the non-AEs without any value addition or further processing. The Resale price method as the name itself suggests is preferably used when the goods are resold . The mechanism for the computation of the ALP under this method is based on this foundation. In our considered opinion the RPM is the most appropriate method for determining the ALP in case of distribution of goods. In other words if the goods purchased are sold as such without any further processing or value addition then the RPM is the most appropriate method. Our view is fortified by the judgment of the Hon ble Jurisdictional High Court in CIT Vs. L oreal India Pvt. Ltd. 2015 (2) TMI 407 - BOMBAY HIGH COURT . We therefore countenance the impugned order on this score and hold that the RPM is the most appropriate method for benchmarking the international transaction. Addition by application of the RPM - AR fairly pointed that similar issue was raised in its appeal before the Tribunal for a preceding year and the Tribunal has approved the application of the RPM but restored the matter to the TPO for determining the ALP by applying this method. A copy of such an order has been placed on record. Respectfully following the precedent we send the matter to the AO/TPO with a direction to compute the ALP of the international transaction under consideration by applying the RPM

Summary

Issues Involved:
1. Rejection of Foreign/Associated Enterprises (AEs) as tested party.
2. Denial of adjustment on account of excess depreciation claimed by the assessee.
3. Restriction of transfer pricing adjustment only to international transactions.
4. Deletion of transfer pricing addition by applying the Resale Price Method (RPM) for benchmarking the international transaction of "Import of trading goods."

Detailed Analysis:

1. Rejection of Foreign/Associated Enterprises (AEs) as Tested Party:
The assessee was incorporated in India and is a wholly owned subsidiary of a Belgian company, engaged in the manufacture of Steel Tyre Cord and Hose Reinforcement wire. The assessee applied the Cost Plus method for determining the arm’s length price (ALP) of the “Import of raw material” transaction, selecting seven foreign/AEs as the tested party. The Transfer Pricing Officer (TPO) rejected this, citing the assessee's failure to furnish necessary documents and reliable supporting evidence for the Functions, Assets, and Risks (FAR) analysis. The TPO adopted the Transactional Net Margin Method (TNMM) instead, leading to a transfer pricing adjustment of Rs. 15,35,50,429/-. The Dispute Resolution Panel (DRP) upheld this, and the assessee appealed to the Tribunal.

The Tribunal noted that the assessee did not challenge the adoption of TNMM or the comparables but only the rejection of foreign/AEs as the tested party. It emphasized that under Indian law, the profit margin of the Indian enterprise should be compared with that of the comparables to determine the ALP. The Tribunal held that considering the foreign/AE as the tested party would contradict the transfer pricing provisions' intent, which aims to prevent profit shifting from the Indian taxation base. The Tribunal cited precedents where foreign/AEs were not accepted as tested parties and upheld the authorities' decision to reject the foreign/AEs as tested parties.

2. Denial of Adjustment on Account of Excess Depreciation Claimed by the Assessee:
The assessee claimed higher depreciation compared to its comparables and sought an adjustment in the Profit Level Indicator (PLI). The TPO rejected this, stating that there was no evidence of different depreciation rates and the assessee did not provide a reasonable calculation for the adjustment. The DRP also refused the adjustment due to the lack of necessary information.

The Tribunal acknowledged that differences in depreciation rates could materially affect net profit margins and should be adjusted. However, it noted that the assessee failed to provide evidence of different depreciation rates. The Tribunal remanded the matter to the AO/TPO to allow adjustments if there is a difference in depreciation rates, directing that the depreciation of comparable companies be recomputed under the straight-line method at the rates used by the assessee.

3. Restriction of Transfer Pricing Adjustment Only to International Transactions:
The TPO computed the transfer pricing adjustment at the entity level, including both associated and non-associated enterprises. The assessee contested this before the DRP, which restricted the adjustment to international transactions. The Revenue appealed this decision.

The Tribunal upheld the DRP's decision, stating that transfer pricing provisions apply only to transactions between associated enterprises, as defined in sections 92 and 92B of the Act. The Tribunal cited jurisdictional High Court rulings supporting this view and dismissed the Revenue's appeal.

4. Deletion of Transfer Pricing Addition by Applying the Resale Price Method (RPM) for Benchmarking the International Transaction of "Import of Trading Goods":
The assessee reported an international transaction of “Import of trading steel cord” and applied the RPM to demonstrate the ALP. The TPO rejected RPM and used TNMM, resulting in a transfer pricing adjustment of Rs. 76,68,310/-. The DRP approved the application of RPM and deleted the addition.

The Tribunal agreed with the DRP, stating that RPM is the most appropriate method for transactions involving the resale of goods without further processing. The Tribunal cited the jurisdictional High Court's judgment in CIT Vs. L’oreal India Pvt. Ltd., supporting the use of RPM. However, it noted that a similar issue in a preceding year was remanded to the TPO for determining the ALP using RPM. Following this precedent, the Tribunal remanded the matter to the AO/TPO to compute the ALP using RPM, allowing the assessee a reasonable opportunity of hearing.

Conclusion:
Both appeals were partly allowed for statistical purposes, with the Tribunal providing detailed directions on each issue to ensure compliance with legal standards and fair assessment. The order was pronounced in the Open Court on 24th April, 2019.