2017 (4) TMI 623 - AT - Income Tax

TP adjustment using the CUP method - Held that - As both assessee as well as the revenue agree that AFDC and ICF, USA are associated enterprises, the transaction between them cannot be considered as comparable uncontrolled transaction in terms of Rule 10B of the IT Rules. As per Rule 10A(ab), uncontrolled transaction means a transaction between enterprises other than associated enterprises, whether resident or non-resident. In the present case, it is an agreed fact that both AFDC and ICF, USA are associated enterprises. Thus, transactions between them cannot be considered as the uncontrolled transaction. Consequently, the entire basis of TP adjustment is incorrect and bad in law. The TP adjustment using the CUP method is accordingly deleted. However, the tribunal being the final fact finding authority, has to necessarily examine whether the international transaction entered by the assessee with its AE is at Arms Length using the other methodology prescribed under Rule 10B of the IT Rules. Moreover, the assessee has filed additional ground of appeal regarding computation of ALP under TNMM, hence, we remit this issue to the file of TPO for computation of ALP of international transactions as per TNMM and in accordance with law.

Summary

Issues Involved:
1. Violation of principles of natural justice in passing the assessment order.
2. Error in reference to TPO and failure to demonstrate motive to shift profits.
3. Validity of draft order and TPO's decision.
4. TPO's consideration of a transaction for TP adjustment.
5. ALP computation using TNMM method.
6. Associated enterprises and uncontrolled transactions.

Detailed Analysis:

1. The appeal raised concerns about the assessment order's compliance with natural justice principles, the reference to the TPO, and the absence of proof regarding profit shifting motives. However, as no arguments were presented on these grounds, they were not addressed.

2. Grounds 2 and 3 challenged the TPO's decision on using a transaction by AFDC with its AE, ICF, USA, as a comparable uncontrolled transaction for TP adjustment. The appeal argued that the products involved were different and adjustments were not appropriately made.

3. An additional ground was filed, proposing the use of the TNMM method for ALP computation due to acceptable margins. The Tribunal considered the material and contentions, noting the agreement that AFDC and ICF, USA were associated enterprises, rendering their transactions incomparable under Rule 10B of IT Rules. Consequently, the TP adjustment using the CUP method was deemed incorrect and deleted. The issue was remitted to the TPO for TNMM computation.

4. The Tribunal emphasized the necessity to verify if the international transaction with the AE was at arm's length using prescribed methodologies. The decision to remit the issue for TNMM computation was based on the additional ground filed by the assessee.

5. The judgment concluded by partially allowing the appeal for statistical purposes, with the decision pronounced in open court on 7th February 2017.