2019 (3) TMI 135 - HC - Income Tax

TP Adjustment - ALP determination - import price of the transaction with the Associated Enterprises was lower than that with the unconnected enterprises - HELD THAT - In certain cases the import price of the transaction with the Associated Enterprises was lower than that with the unconnected enterprises. TPO, however, took only those transactions where the import price with the Associated Enterprises was higher. We cannot but observe that there was no warrant for the TPO to interfere with the valuation of the transactions; where the assessee had shown lower valuation for imports from the Associated Enterprises, since those were the admitted price of the assessee itself. In those instances where there was a higher valuation shown in the imports from the Associated Enterprises, the ALP was fixed by the AO finding that there was a difference of more than 5% with the valuation of transactions with unconnected enterprises. As has been contended by the assessee, the very intention of fixation of ALP is to ensure that by mere manipulation of prices i.e. showing higher prices for imports and lower for exports, the actual profit in a transaction shall not be suppressed. Thus resulting in tax being avoided on the income generated in a transaction with an Associated Enterprise; the benefit of which will flow back to the assessee itself. The exercise undertaken by the TPO, according to us, was perfectly in tandem with the intention of the Legislature. There can be no ground taken that there was a pick and choose adopted by the AO. ALP had to be fixed only with respect to those instances of imports, where the valuation was higher when the transaction was with an Associated Enterprise than a similar transaction with unconnected enterprise. - Decided in favour of the Revenue and against the assessee

Summary

Issues:
1. Addition of income from international transactions under Section 92C(4) of the Income Tax Act, 1961.
2. Fixation of Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO).
3. Comparison of prices in transactions with Associated Enterprises and unconnected enterprises.
4. Validity of reference to TPO under Instruction No.3 of the CBDT.
5. Allegation of pick and choose by the TPO in fixing ALP.

Analysis:
1. The judgment deals with an appeal against the order of the Income Tax Appellate Tribunal regarding the addition of income from international transactions under Section 92C(4) of the Income Tax Act, 1961 for the assessment year 2003-04. The assessee, engaged in the purchase and export of cashew nuts, contested the addition made by the Assessing Officer based on the decision of the Transfer Pricing Officer (TPO) in fixing the Arm's Length Price (ALP) under Section 92CA(3).

2. The main objection raised by the assessee was the lack of a standard benchmark for price fixation due to the nature of the agricultural commodity involved. The appellate Tribunal was urged to consider that the appellant did not intend to evade tax and that the TPO's fixation of ALP was biased towards revenue interests. The Tribunal found discrepancies in the comparison made by the TPO and rejected the assessee's objection to the ALP fixation.

3. The Tribunal's decision was based on the comparison of prices in transactions with Associated Enterprises and unconnected enterprises. It was noted that the TPO's selection of transactions for ALP determination was justified as per the legislative intent to prevent profit suppression through price manipulation. The Tribunal upheld the AO's decision regarding the ALP fixation, emphasizing the importance of preventing tax avoidance in transactions with Associated Enterprises.

4. The judgment also addressed the validity of referring the issue to the TPO under Instruction No.3 of the CBDT, which required references if the value of international transactions exceeded a certain threshold. The Tribunal found no prohibition on referring cases below the threshold, especially with the approval of the Commissioner of Income Tax, thus supporting the lower authorities' decisions.

5. Lastly, the judgment discussed the allegation of pick and choose by the TPO in fixing the ALP. The Tribunal concluded that the TPO's actions were in line with legislative intent and not arbitrary, as the ALP needed to be fixed based on instances where valuation discrepancies with unconnected enterprises exceeded 5%. Ultimately, the questions of law were answered in favor of the Revenue, rejecting the appeal and leaving the parties to bear their costs.