2016 (12) TMI 1135 - AT - Income Tax

Transfer pricing adjustment - most appropriate method selection - Held that - The assessee claims that Transaction Net Margin Method is the most appropriate method. For the purpose of transfer pricing adjustment, Section 92C provides for the method to be adopted. Therefore, the Transfer Pricing Officer and Dispute Resolution Panel have to determine the transfer pricing adjustment by following any one of the methods prescribed under Section 92C of the Act, which would be appropriate to the international transaction made by the assessee. In the case before us, the Dispute Resolution Panel and the Transfer Pricing Officer have not adopted any of the methods prescribed under Section 92C of the Act. As rightly contended by the Ld.counsel for the assessee, the DRP resorted to statistical method to benchmark the international transaction. This Tribunal is of the considered opinion that the DRP is expected to find out most appropriate method among the methods prescribed under Section 92C of the Act. The Dispute Resolution Panel is not expected to travel beyond the method prescribed under Section 92C of the Act. Cusstoms duty adjustment and working capital employed, the Dispute Resolution Panel has simply placed its reliance on its own order in the assessee s own case for assessment year 2009-10. This Tribunal examined the directions of the Dispute Resolution Panel in the assessee s own case for assessment year 2009-10 wherein Dispute Resolution Panel directed the Transfer Pricing Officer to determine the transfer pricing adjustment afresh. This Tribunal found that such a direction cannot be given by the Dispute Resolution Panel. The Dispute Resolution Panel can at the best call for a remand report from the Transfer Pricing Officer and determine the issue by directing the Assessing Officer to make adjustment as determined in the directions of the Dispute Resolution Panel and accordingly, this Tribunal remanded the matter back to the file of the Assessing Officer. In the case before us, the issue is identical to that of assessment year 2009-10 and the Dispute Resolution Panel has simply followed their earlier order. This Tribunal is of the considered opinion that the matter needs to be reconsidered as directed by this Tribunal in the earlier order. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of Assessing Officer. - Decided in favour of assessee for statistical purpose

Summary

Issues:
Transfer pricing adjustment based on Transaction Net Margin Method, Customs duty payment adjustment, working capital employed adjustment.

Transfer Pricing Adjustment:
The appeal concerns the assessment year 2010-11, where the assessee, a subsidiary of a Korean corporation, engaged in manufacturing automotive air conditioning systems, faced transfer pricing adjustments by the Transfer Pricing Officer and the Dispute Resolution Panel. The assessee maintained transfer pricing documentation using the Transaction Net Margin Method for transactions with its Associate Enterprise. The contention was that Customs duty paid for importing raw material and capital assets should be considered in transfer pricing adjustments. The Dispute Resolution Panel upheld the Transfer Pricing Officer's decision, which did not allow Customs duty payment adjustment. The assessee argued that the statistical method adopted by the authorities was not justified, advocating for the Transaction Net Margin Method as the most appropriate.

Customs Duty Payment Adjustment:
The dispute also involved the Customs duty payment adjustment. The assessee imported a significant portion of raw material, incurring additional Customs duty costs. The Transfer Pricing Officer determined a downward adjustment due to the high cost of imports and the inability to pass on Customs duty to customers. The Dispute Resolution Panel confirmed the decision, citing the need to consider only the current year data of comparable companies for comparison. The assessee argued that the adjustment for Customs duty payment was essential to neutralize the comparison with established companies that did not face similar import costs.

Working Capital Employed Adjustment:
Regarding the working capital employed adjustment, the Dispute Resolution Panel did not consider it necessary since the comparison was made at the gross profit margin level. The authorities relied on the decision in the assessee's own case for the assessment year 2009-10. However, the Tribunal found that the matter needed reconsideration, similar to the earlier case, and remitted the issue back to the Assessing Officer for a fresh determination, emphasizing the importance of following the prescribed methods under Section 92C of the Income-tax Act, 1961.

In conclusion, the appeal was allowed for statistical purposes, and the entire issue was remitted back to the Assessing Officer for reconsideration in accordance with the law, providing the assessee with a reasonable opportunity to present their case.