2018 (5) TMI 1374 - AT - Income Tax

Transfer pricing adjustment - transaction of import of raw materials - Held that - We find merit in the plea of assessee in this regard that the DRP should have admitted the additional evidence, consider the same and then decide the issue. The DRP having failed to do so, the action of DRP in this regard is not justified in view of the provisions of the Act. Accordingly, we remit this issue back to the file of DRP, who shall admit, consider and adjudicate the additional evidence and decide the issue, in accordance with law. It may be pointed out herein itself that further plea of assessee in this regard was that no adjustment on this count was made in any of the earlier years. The said submission of assessee needs verification and in case an approach has been adopted from year to year, the same may not be disturbed unless and until there is change in facts and circumstances. Reasonable opportunity of hearing shall be provided to the assessee by DRP in this regard. Further, the assessee is directed to comply with the notices issued and submit information and clarification before the DRP for adjudicating the issue. The issue raised vide grounds of appeal No.2 and 3 is allowed for statistical purposes. Transaction of import of finished goods - Held that - Re-sale Price Method is the most appropriate method to be applied in such circumstances since the assessee is purchasing finishing goods from its associated enterprise at a price, which in turn, re-sells to the unrelated enterprises. The Assessing Officer / TPO is thus, directed to apply RPM method and determine the margins of assessee and of the comparables. The assessee has filed the working of assessee s margins and the margins of comparables which may be verified and in case the same is within /- 5% range, no transfer pricing adjustment needs to be made in the hands of assessee. Reasonable opportunity of hearing shall be given to the assessee. The ground of appeal No.4 is allowed as indicated above. Transfer pricing adjustment made in respect of transaction of export of packing materials - transaction of export of spools to associated enterprise - Held that - The assessee had exported packing material in the shape of spool to its associated enterprise, on which tyre cord or the hose wire was wound to send the same to the customers. The assessee charged associated enterprise actual cost of calculation of spools with margin of 10%. The TPO was of the view that indirect cost also needs to be considered for undertaking transaction of export of spools to associated enterprise. Transfer pricing adjustment made in respect of transaction of export of packing materials - Held that - We reverse the order of Assessing Officer/TPO/DRP and hold that no adjustment has to be made in the transaction of export of packing material to the associated enterprise, wherein the assessee had charged cost of calculation of spools with markup of 10% i.e. on account of direct cost to its associated enterprise, such a transaction is at arm s length and no adjustment in this regard needs to be made. Hence, the ground of appeal No.5 is allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment for import of raw material.
2. Non-admission of additional critical evidence.
3. Transfer pricing adjustment for import of trading goods.
4. Transfer pricing adjustment for export of packing material.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Import of Raw Material:
The assessee challenged the transfer pricing adjustment of ?5,73,57,820 made by the Assessing Officer (AO) based on the Transfer Pricing Officer (TPO)'s findings. The AO, following the Dispute Resolution Panel (DRP)'s directions, rejected the assessee's benchmarking approach and contemporaneous documentation, holding that the international transactions related to the import of raw materials were not at arm's length. The TPO adopted the Profit Level Indicator (PLI) as Profit Before Interest and Taxes (PBIT) over total cost, instead of the assessee’s method of PBDIT/sales. The DRP upheld the TPO's adjustment, rejecting the assessee's contention that the associated enterprise (AE) should be the tested party and that the markup earned by the AE was fair and reasonable. The Tribunal remitted the issue back to the DRP to admit and adjudicate the additional evidence provided by the assessee, emphasizing that the DRP proceedings are a continuation of the AO/TPO proceedings and should consider additional evidence.

2. Non-admission of Additional Critical Evidence:
The assessee argued that the DRP erred in not admitting additional evidence submitted to support its contention regarding the arm's length nature of the transactions. The Tribunal held that the DRP should have admitted and considered the additional evidence, as the proceedings before the DRP are a continuation of the assessment proceedings. The Tribunal directed the DRP to admit, consider, and adjudicate the additional evidence, providing a reasonable opportunity of hearing to the assessee.

3. Transfer Pricing Adjustment for Import of Trading Goods:
The assessee contested the adjustment of ?91,36,453 for the import of trading goods, arguing that the AO/TPO erred in rejecting the appropriate comparables and applying a markup of 11% instead of the 7% markup charged by the AE. The Tribunal found merit in the assessee's contention that the Re-sale Price Method (RPM) should be applied as the most appropriate method for benchmarking the transaction, given that the assessee was selling imported goods without any value addition. The Tribunal directed the AO/TPO to apply the RPM method and verify the margins of the assessee and comparables, allowing the ground of appeal.

4. Transfer Pricing Adjustment for Export of Packing Material:
The assessee challenged the adjustment of ?4,31,274 made by the AO/TPO for the export of packing material, arguing that the TPO erred in including indirect costs in the transaction value. The Tribunal referred to its earlier decision in the assessee’s own case, where it was held that no adjustment should be made as the transaction was at arm's length with a 10% markup on the direct cost. Following the same reasoning, the Tribunal reversed the AO/TPO/DRP's order, holding that no adjustment was required for the export of packing material.

Conclusion:
The Tribunal allowed the appeal of the assessee, remitting the issues related to the import of raw materials and non-admission of additional evidence back to the DRP for reconsideration, and directing the AO/TPO to apply the RPM method for the import of trading goods and to make no adjustment for the export of packing material.