2018 (4) TMI 1816 - AT - Income Tax

TP Adjustment - international transaction - TPO worked out Transfer Pricing adjustment at nil by applying the difference in PLI to the value of international transaction alone - HELD THAT - As relying on TARA JEWELS EXPORTS PVT. LTD 2015 (12) TMI 1130 - BOMBAY HIGH COURT Adjustment to the transfer price should be restricted to the value of international transaction i.e. transactions entered into by the assessee with its AEs and not in relation to the transactions entered into by the assessee with third parties. Accordingly, we confirm the order of CIT(A) and this issue of Revenue's appeal is dismissed

Summary

Issues:
Transfer Pricing Adjustment - Restriction to International Transactions Only

Analysis:
The appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals) directing the Assessing Officer (AO) / Transfer Pricing Officer (TPO) to re-compute the Transfer Pricing adjustment with regard to international transactions only. The Revenue raised three grounds questioning the direction given by the CIT(A) in this regard. The main contention was whether the Transfer Pricing adjustment should be limited to 'International Transactions' alone or extended to the entire business operations of the assessee.

The assessee, a 100% export-oriented unit engaged in the manufacture and export of diamond studded jewelry, argued that the adjustment to the transfer price should be restricted to the value of international transactions with associated enterprises (AEs) only, not including transactions with third parties. The ITAT had previously held in the assessee's case for A.Y. 2004-05 that any Transfer Pricing adjustment should be limited to the value of international transactions alone. Despite the department's appeal against the ITAT's decision, the TPO applied the difference in net margins of the assessee vis-a-vis comparable companies to the total cost incurred by the assessee. The AO then determined the total income of the assessee, including the transfer price adjustment, leading to the dispute before the CIT(A) and subsequently the Tribunal.

The ITAT, considering the previous rulings in the assessee's case for A.Y. 2004-05 and subsequent years, upheld the contention that Transfer Pricing adjustment should be restricted to the value of international transactions alone. The Tribunal emphasized the need for consistency in applying the principles of the Transactional Net Margin Method (TNMM) and directed the AO to compute the Arm's Length Price (ALP) in respect of international transactions only, restricting any adjustment to such transactions alone.

The issue was further reinforced by the decision of the Hon'ble Bombay High Court, which dismissed the department's appeal and confirmed that the adjustment to the transfer price should be limited to the value of international transactions with AEs only. The High Court clarified that the adjustment required to arrive at ALP should be done only in respect of transactions with AEs, not including non-AE transactions. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to restrict the Transfer Pricing adjustment to international transactions, leading to the dismissal of the Revenue's appeal.

In conclusion, the Tribunal upheld the direction to restrict the Transfer Pricing adjustment to international transactions alone, in line with the previous decisions and legal provisions, ultimately dismissing the Revenue's appeal in this matter.