2017 (1) TMI 454 - AT - Income Tax

Transfer pricing adjustment - existence of AE - Cost Plus Method (CPM) for determining the ALP - Held that - We find that the assessee had filed audited accounts for year under appeal along with its return of income, that it had claimed that IT s were entered into with its AE. s, that later on it claimed that Star and DTL were not its AE s, that no documentary evidence was produced before the revenue authorities in support of its claim, that it did not file any confirmation or certificate from the auditors about the incorrectness of the audit report especially about the existence of AE s. Therefore, we are of the opinion that order of the FAA does not suffer from any legal infirmity. Confirming the same, we decide the first ground of appeal against the assessee. With regard to the markup of 23. 45%, we find that the assessee had included only two of the items of the profit and loss account i. e. salary and the rent, that it had not included the other charges for determining the ALP. We are of the opinion that the matter needs further verification on part of the AO. If the assessee had not incurred any expenditure for the alleged three items same should not be considered for mark-up purposes. The issue is restored back to the file of the AO for the limited purposes i. e. to decide as to whether the assessee had claimed expenditure under the head salary and rent only for mark-up purposes. If so, necessary orders may be passed.

Summary

Issues:
1. Adjustment of international transactions with Associated Enterprises (AEs) under section 92 of the Act.
2. Determination of Arm's Length Price (ALP) using Cost Plus Method (CPM).
3. Challenge to the adjustment made by the Assessing Officer (AO) and upheld by the First Appellate Authority (FAA).
4. Dispute regarding the inclusion of expenses for markup purposes.
5. Verification of the correctness of the audit report and the existence of AEs.
6. Decision on the appeal filed by the assessee.

Analysis:

1. The appeal challenged the adjustment of ?3.06 lakhs in international transactions with AEs. The AO found the assessee had not substantiated its claim regarding the transactions, leading to the adjustment under section 92 of the Act.

2. The AO questioned the method used by the assessee to determine ALP, specifically the Cost Plus Method (CPM). The AO adjusted the income by ?3.06 lakhs based on the markup applied to salary and rent expenses, contrary to the assessee's approach.

3. The FAA upheld the AO's decision, noting the lack of documentary evidence supporting the assessee's claims. The FAA rejected the argument that certain entities were not AEs and upheld the adjustment made by the AO.

4. The dispute also centered on the inclusion of expenses for markup purposes. The AO contended that the entire cost should be considered for markup under CPM, while the assessee argued for a specific approach based on the contractual relationship.

5. The correctness of the audit report and the existence of AEs were crucial points of contention. The failure to provide documentary evidence and certifications led to the rejection of the assessee's claims by both the AO and the FAA.

6. The Tribunal partially allowed the appeal, directing further verification by the AO regarding the inclusion of expenses for markup purposes. The issue was remanded back to the AO for a detailed examination and necessary orders.

In conclusion, the judgment addressed various issues related to international transactions, determination of ALP, adjustment disputes, and the verification of claims and audit reports. The decision highlighted the importance of providing substantial evidence and complying with legal provisions in such cases.