2016 (4) TMI 86 - AT - Income Tax

Transfer pricing adjustment towards international transaction of Job work - MAM - Held that - It is discernible that the Tribunal in the immediately preceding assessment year, after treating the assessee as a job worker, has upheld the CUP as most appropriate method. Since the facts and circumstances for the instant year are admittedly similar to those of the preceding year, respectfully following the precedent, we hold that the CUP is the most appropriate method in so far as the international transaction is concerned. Reducing the amount of insurance receipt by the assessee from its AE - Held that - Similar issue was there before the tribunal for the immediately preceding year. The Tribunal has discussed it its order by noticing that the loss, if any, would be recovered from the insurance company and paid to the AE. That is how, the tribunal deleted similar addition for the preceding year. Though ld. D.R. relied on the order passed by TPO, but could not point out any distinguishing feature in the facts of the current year vis a vis the immediately preceding year, which has been decided by the tribunal. - Decided in favour of assessee

Issues Involved:
1. Addition on account of transfer pricing adjustment towards the international transaction of 'Job work'.
2. Addition on account of transfer pricing adjustment in the international transaction of Provisions of facility, freight, and insurance.

Issue-wise Detailed Analysis:

1. Addition on account of transfer pricing adjustment towards the international transaction of 'Job work':

The primary issue in this appeal is the addition of ?8,65,21,650/- made by the Assessing Officer (AO) due to transfer pricing adjustment related to the international transaction of 'Job work'. The assessee, an Indian company engaged in manufacturing and trading of gold and silver items, reported international transactions with its associated enterprise (AE), a Dubai-based company. The assessee initially used the Cost Plus method to determine the Arm's Length Price (ALP) but later switched to the Comparable Uncontrolled Price (CUP) method during the proceedings before the Transfer Pricing Officer (TPO).

The TPO rejected the assessee's methods and opted for the Transactional Net Margin Method (TNMM), calculating the assessee's Profit Level Indicator (PLI) by including the value of gold imported and jewelry sold to its AE. The TPO's adjustment resulted in an addition of ?8,65,21,650/-, which was upheld by the Dispute Resolution Panel (DRP).

Upon appeal, the tribunal noted that the assessee was not engaged in the manufacturing and export of gold jewelry but was merely a job worker receiving gold bars from its AE, converting them into jewelry, and returning them. The tribunal found that the entries in the assessee's books were made to comply with formalities and did not reflect ownership of the gold. The tribunal relied on its earlier order for the preceding year, where it was held that the assessee was a job worker and not involved in purchasing or selling gold/jewelry. Consequently, the tribunal upheld the CUP method as the most appropriate method and determined that the price charged by the assessee from its AE was at ALP. The addition of ?8.65 crore was deleted.

2. Addition on account of transfer pricing adjustment in the international transaction of Provisions of facility, freight, and insurance:

The second issue involves the addition of ?1,94,53,297/- made by the AO due to transfer pricing adjustment related to the provision of facility, freight, and insurance. The TPO found that the assessee took significant risks by carrying gold bars/jewelry from one country to another without adequate compensation from its AE. The TPO proposed a 1% risk factor, resulting in a financial risk compensation of ?1,98,86,927/-, from which the insurance receipt of ?4,33,630/- was deducted, leading to the proposed adjustment.

The DRP approved the TPO's action but directed the TPO to reduce the reimbursement amount and limit the addition accordingly. The AO made the addition in the final assessment order after reducing the insurance receipt.

The tribunal noted that a similar issue was addressed in the preceding year, where the addition was deleted as any loss would be recovered from the insurance company and paid to the AE. The tribunal found no distinguishing features in the facts of the current year compared to the preceding year. The tribunal's decision for the preceding year was upheld by the Hon'ble Delhi High Court. Therefore, the tribunal ordered the deletion of the addition of ?1.94 crore.

Conclusion:

In conclusion, the tribunal allowed the appeal filed by the assessee, deleting the additions made on account of transfer pricing adjustments for both the 'Job work' transaction and the provision of facility, freight, and insurance. The tribunal's decision was based on the consistent application of the CUP method and the precedent set in the preceding year's case, which was upheld by the Hon'ble Delhi High Court.

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