2018 (10) TMI 1818 - AT - Income Tax

TP Adjustment - DRP directing the TPO to recompute the ALP by not including the FBO value of cost base of the assessee - HELD THAT - Rule 10B(1)(e) recognizes that the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs ITA 306/2012 Page 33 incurred or sales effected or assets employed or to be employed by the enterprise ... (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. TPO‟s reasoning to enhance the assessee s cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee s hands on the basis of a fixed percentage of the free on board value of export made by unrelated party venders. We further find that in A.Y 2012-13, the TPO himself has not made any T.P. adjustment on the impugned issue. Respectfully following the decision of the Hon'ble High Court 2014 (1) TMI 501 - DELHI HIGH COURT we decline to interfere with the directions of the DRP.

Summary

Issues:
- Whether the Transfer Pricing Officer (TPO) erred in excluding the FBO value of cost base of the assessee while computing the Arm's Length Price (ALP).

Analysis:
The judgment pertains to an appeal by the Revenue against an assessment order framed under the Income-tax Act, 1961 for the assessment year 2010-11. The primary grievance of the Revenue was that the Dispute Resolution Panel (DRP) erred in directing the TPO to recompute the ALP without including the FBO value of the assessee's cost base. The appellant contended that the issue was settled in favor of the assessee by the decisions of the High Court and the Tribunal in previous assessment years. The Tribunal noted that the TPO himself acknowledged the rulings in favor of the assessee by the High Court and decided to follow the same approach as in the previous assessment year due to the pending Special Leave Petition (SLP) against the decision. The Tribunal emphasized that the TNMM method requires the net profit margin to be calculated only with reference to costs incurred by the assessee and not by third-party vendors or associated enterprises. The TPO's decision to enhance the assessee's cost base by considering costs incurred by third-party vendors was deemed unsupported by the TNMM rules. The Tribunal also highlighted that in a subsequent assessment year, the TPO did not make any TP adjustment on the same issue, further supporting the decision to decline interference with the DRP's directions. Consequently, the appeal of the Revenue was dismissed, upholding the DRP's directions regarding the ALP computation issue.

This detailed analysis of the judgment showcases the intricate legal reasoning behind the decision, emphasizing the importance of adhering to the specific rules and guidelines governing Transfer Pricing assessments. The Tribunal's reliance on previous judicial decisions and the textual interpretation of relevant provisions underscores the consistency and clarity required in tax assessments to ensure fairness and compliance with the law.