2016 (5) TMI 118 - HC - Income Tax

Transfer pricing adjustment - TPO, referring to Rule 10B(1)(e)(i) held that the net profit margin realized by the Assessee from an international transaction entered into with associated enterprises is to be computed in relation to the costs incurred, sales effected or assets employed by the Assessee - Held that - ITAT has followed the decision of this Court in Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax (2014 (1) TMI 501 - DELHI HIGH COURT ), where an identical issue had come up for consideration. This Court, in the said decision, came to the conclusion that the computation of the operating profit margin by increasing the cost of the sales leads to an arbitrary adjustment of the Assessee s income and that such alteration resides plainly outside the Rules and the provisions of the Act . The Court held that the TPO s reasoning to enhance the costs by considering the cost of manufacture and export of finished goods was nowhere supported by Rule 10B(1) (e) of the Rules. - Decided against revenue

Summary

Issues:
Transfer pricing adjustment based on Transactional Net Margin Method (TNMM) for support services provided by the Assessee to associated enterprises.

Analysis:
The appeals by the Revenue were directed against the common order passed by the Income Tax Appellate Tribunal (ITAT) for the Assessment Years 2007-08 & 2008-09. The Assessee, a subsidiary of a Japanese company, provided support services to group entities. The Transfer Pricing Officer (TPO) disagreed with the Assessee's approach in determining the Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) and proposed significant adjustments. The Dispute Resolution Panel (DRP) upheld most of the TPO's adjustments, leading to substantial increases in the ALP for the relevant years.

The TPO's adjustments were based on including the cost of sale in the denominator of the Profit Level Indicator (PLI) and treating the services provided as equivalent to trading income. However, the ITAT, following a previous decision, concluded that such alterations in computing the operating profit margin were arbitrary and not supported by the relevant rules. The Court held that the TPO's reasoning to enhance costs was not in accordance with Rule 10B(1)(e) of the Rules.

The Revenue sought to challenge the decision based on a pending appeal before the Supreme Court, but the Court declined to frame new questions as the issues were covered by the previous decision. The Revenue also requested to keep open the question regarding the determination of additions to the Assessee's taxable income within the range specified by Section 92C of the Act. However, since the main issue was decided in favor of the Assessee, the Court found no basis for such apprehension and dismissed the request.

Ultimately, the Court dismissed the appeals, upholding the ITAT's decision and emphasizing that the adjustments made by the TPO were not justified under the applicable rules.