2016 (3) TMI 459 - HC - Income Tax

Adoption of Profit Level Indicator (PLI) of OP/TC to determine ALP - Tribunal rejected the TPO s PLI of Return On Capital Employed (ROCE) - Held that - We find that in terms of Rule 10B1( e) (i) of the Income Tax Rules, it is open for the authorities to determine the net profit margin by applying as its base either cost or sales or any other relevant base. It is for the authorities to determine the appropriate base while applying the TNMM entirely depending on the facts and circumstances of the case before it. Although the RoCE could be a basis to determine the profit margin to arrive at ALP having regard to capital employed as a base. In the present facts, as correctly emphasized by the Tribunal, there is a common pool of capital used both for International Transaction with AE s and also others. Thus, in the absence of identification or segregation of capital employed with regard to AE s transaction and those with others, the RoCE method would not indicate the appropriate margin for determining the ALP. Thus, the RoCE method has not been accepted by the Tribunal to determine the ALP. Further, even before us, as also before the Tribunal, the Revenue has not been able to show any determination of margin by RoCE method to arrive at the ALP of International Transactions in the Respondent-Assessee s industry. View taken by the Tribunal is a reasonable and possible view

Summary

Issues involved:
1. Challenge to the order passed by the Income Tax Appellate Tribunal for Assessment Year 2008-09 under Section 260A of the Income Tax Act, 1961.
2. Questions of law raised by the Revenue regarding the Profit Level Indicator (PLI) and adjustment on international transactions.

Analysis:

Issue 1: Challenge to Tribunal's Order
The Respondent-Assessee, engaged in jewellery manufacturing, had international transactions with Associated Enterprises (AE). The Transfer Pricing Officer (TPO) adopted the Transactional Net Margin Method (TNMM) to determine the Arms Length Price (ALP), using Return on Capital Employed (RoCE) as the Profit Level Indicator (PLI). However, the Respondent-Assessee used Total Cost as the base for PLI. The TPO's ALP margin was 12.97%, leading to a Transfer Pricing adjustment. The Assessing Officer passed a draft order based on TPO's ALP, which was contested before the Dispute Resolution Panel (DRP) but rejected. The Tribunal upheld TNMM but disagreed on using RoCE due to lack of capital segregation for AE transactions, directing the use of Total Cost as base for PLI under TNMM. The Tribunal's decision was based on similar cases in the jewellery industry, where Total Cost was used to determine PLI.

Issue 2: Questions of Law Raised by Revenue
(a) The Revenue argued that RoCE should be the appropriate PLI due to the industry's capital-intensive nature, but failed to challenge the Tribunal's reasoning. The Tribunal correctly applied Rule 10B1(e)(i) of the Income Tax Rules, allowing flexibility in choosing the base for TNMM based on case-specific factors. The common pool of capital for both AE and non-AE transactions made RoCE unsuitable for determining ALP in this case. The Tribunal's rejection of RoCE was deemed reasonable and valid.
(b) The Counsel acknowledged that previous court decisions favored the Respondent-Assessee regarding adjustments on international transactions. Citing precedents, the Court found no substantial question of law in this regard, leading to the dismissal of the Appeal without costs.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the importance of considering industry specifics and transaction details in determining the appropriate Profit Level Indicator and Arms Length Price under the Transfer Pricing regulations.