2016 (5) TMI 203 - HC - Income Tax

Transfer pricing adjustment - international transactions relating to the purchases made and the royalty paid by the assessee to Keihin Corporation, Japan (hereafter KC ) - Held that - The amounts paid were not in accordance with the agreement between the assessee and the KC is concerned, we find that no such contention had been urged by the Revenue either before the Commissioner of Income-tax (Appeals) or before the Tribunal. Therefore, in our view, no such plea can be permitted to be taken for the first time in these proceedings. The contention that the adjustment on account of expenses as determined by the Transfer Pricing Officer must be attributed entirely to the international transaction is bereft of any merits. During the financial year 2003-04 relating to the assessment year 2004-05, the assessee had reported an operating income of ₹ 72,24,22,000. The total expenses for the said period amounted to ₹ 68,00,88,000. Admittedly, the international transactions in question amounted to ₹ 15,90,66,935 which were only 23.38 per cent. in value of the total expenses. The Transfer Pricing Officer had determined the profit level indicator (operating profit over total cost) of comparable cases at 8.29 per cent. against 6.22 per cent. as declared by the assessee. Applying the profit level indicator of comparable cases, the adjusted total expenses were computed at ₹ 66,71,17,924, thus, indicating an adjustment of ₹ 1,29,70,076. As is apparent from the above, the said adjustment related to the entire expenses and not just the international transactions alone. Since the international transactions only constituted 23.38 per cent., a transfer pricing adjustment proportionate to that extent could be made in respect of such international transactions. Thus, only an adjustment of ₹ 30,33,593 could be attributed to the international transactions in question. The same was accepted by the Commissioner of Income-tax (Appeals) as well as the Tribunal. We also find no infirmity with the view of the Commissioner of Income- tax (Appeals) and the Tribunal that the assessee had acted like any other original equipment manufacturer (OEM) and could not be treated as a job worker or a contractor. - Decided against revenue

Summary

Issues:
Transfer Pricing Adjustment in International Transactions, Royalty Payment, Arm's Length Price Determination, Jurisdiction of Transfer Pricing Officer, Adjustment of Expenses in International Transactions

Transfer Pricing Adjustment in International Transactions:
The case involved appeals by the Revenue against a Tribunal order regarding transfer pricing adjustments made by the Assessing Officer in relation to international transactions for the assessment years 2004-05 and 2005-06. The Transfer Pricing Officer determined an adjustment based on the operating profit to total cost ratio, leading to a transfer pricing adjustment of &8377; 1,29,70,076 for the assessment year 2004-05. The Tribunal upheld the Commissioner of Income-tax (Appeals) decision to delete the transfer pricing adjustments made by the Assessing Officer, as they were not solely attributable to international transactions but to the entire expenses. The adjustment proportionate to international transactions was calculated at &8377; 30,33,593, which was accepted by the Commissioner of Income-tax (Appeals) and the Tribunal.

Royalty Payment and Arm's Length Price Determination:
Regarding the payment of royalty to Keihin Corporation, Japan (KC), the Transfer Pricing Officer concluded that no royalty would be payable if the transactions were at arm's length, considering the assessee as a contract manufacturer. However, the Commissioner of Income-tax (Appeals) disagreed, stating that the functions performed by the assessee did not align with a contract manufacturer's role. The Commissioner of Income-tax (Appeals) also noted that the Transfer Pricing Officer exceeded its jurisdiction by not computing the arm's length price in accordance with the Act. The Tribunal upheld these findings.

Jurisdiction of Transfer Pricing Officer:
The Transfer Pricing Officer's jurisdiction was questioned for rejecting agreements between the assessee and KC and not computing the arm's length price correctly. The Commissioner of Income-tax (Appeals) held that the Transfer Pricing Officer overstepped its authority in this regard, which was upheld by the Tribunal.

Adjustment of Expenses in International Transactions:
The Revenue contended that the entire adjustment on operating expenses should be attributed only to international transactions. However, the High Court found this contention without merit, as the adjustment related to the entire expenses and not just international transactions. The adjustment proportionate to international transactions was calculated at &8377; 30,33,593, and the High Court upheld the decisions of the Commissioner of Income-tax (Appeals) and the Tribunal on this matter.

In conclusion, the High Court dismissed the appeals by the Revenue, finding no substantial question of law for consideration. The decisions of the Commissioner of Income-tax (Appeals) and the Tribunal were upheld, and the appeals were dismissed with no order as to costs.