2016 (8) TMI 1049 - HC - Income Tax

Transfer pricing adjustment - discarding the CUP method - Held that - Section 92-C(1) of the Act pertains to the determination of the arm s length price in relation to an international transaction. Section 92-F (ii) defines arm s length price to mean a price, which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. If, for determination of the arm s length price, the assessee had applied more than one of the permissible methods, as recognized under Section 92-C (1), then qua each of the transactions, to determine the arm s length price, the TPO is required to give reasons as to why one of such methods is being preferred over the others. In the case in hand, as observed earlier, for 09 of the 12 international transactions, the order of the TPO is completely silent as to why for determining arm s length price qua them, he has preferred to discard the CUP method, when the same had been applied by the assessee. For the remaining 03 international transactions also, the reasons so given are found by us to be vague and non-specific. In the light of the observations made above, the TPO was required to give reasons for discarding the CUP method qua each of the transactions as all the 12 international transactions entered into by the appellant were distinct. The order of the TPO, having been found to be lacking as above, we find no fault with the order of the Tribunal remitting the matter to the TPO for fresh assessment in accordance with law.

Issues:
1. Remanding transfer pricing adjustment issue by Tribunal.
2. Not allowing abnormal operating expenses adjustment under TNMM method.
3. Considering Bajaj Auto Ltd. as a perfect comparable.
4. Not allowing depreciation claim on moulds.
5. Not allowing sales tool expenses claim.

Issue 1: Remanding transfer pricing adjustment issue by Tribunal:
The appellant challenged the Tribunal's decision to remand the matter back to the Transfer Pricing Officer (TPO) regarding the rejection of the Comparable Uncontrolled Price (CUP) method for determining the arm's length price. The TPO's assessment order lacked specific reasons for discarding the CUP method for several transactions. The Court held that under Section 92-C of the Income Tax Act, when multiple methods are applied, reasons for choosing one over the other must be provided to prevent prejudice to the assessee. As the TPO failed to provide adequate reasons for rejecting the CUP method, the Tribunal's decision to remand the matter for a fresh assessment was upheld.

Issue 2: Not allowing abnormal operating expenses adjustment under TNMM method:
The Tribunal did not allow the adjustment of abnormal operating expenses while determining the net operating margins of the appellant under the Transactional Net Margin Method (TNMM). The Tribunal remitted this issue back to the TPO for reconsideration along with the transfer pricing adjustment issue. The Court did not provide a specific opinion on this issue at the current stage but indicated that the appellant could raise it after the fresh assessment order by the TPO.

Issue 3: Considering Bajaj Auto Ltd. as a perfect comparable:
The appellant did not press this issue during the proceedings, indicating a lack of contention regarding the consideration of Bajaj Auto Ltd. as a perfect comparable by the Tribunal.

Issue 4: Not allowing depreciation claim on moulds:
The Tribunal observed that the TPO's decision to reduce the rate of depreciation on moulds was based on previous years' views, which may have been reversed in appeals. As the fate of these views was unclear, the Tribunal remitted this matter back to the TPO for further consideration. The Court found no reason to interfere with the Tribunal's decision on this issue.

Issue 5: Not allowing sales tool expenses claim:
Similar to the depreciation claim issue, the Tribunal remitted the matter of disallowing sales tool expenses back to the TPO due to uncertainties regarding the fate of previous views on this matter. The appellant's counsel indicated that the TPO's views on both depreciation and sales tool expenses had been reversed in appeals, supporting the Tribunal's decision to remand these issues for fresh assessment.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision to remand the transfer pricing adjustment issue to the TPO for a fresh assessment. The Court did not interfere with the Tribunal's decisions on the other issues raised by the appellant, indicating that further proceedings could address these matters based on the outcomes of the fresh assessment order by the TPO.

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