2020 (12) TMI 813 - AT - Income Tax

TP Adjustment - how to compute PLI when RSP Method is applied in this peculiar case - computation of the profit level indicator as directed by the learned CIT-A - as submitted by AR job profile of three expatriates employees and stated that cost of these employees cannot be reduced while computing the profit level indicator when resale price method is to be applied - HELD THAT - According to the provisions of rule 10 B for the determination of the arm's-length price u/s. 92C, the resale price method computation shall be determined according to sub-rule (1) (b) of the income tax rules. Mostly looking at the profile of the expatriates provided by the ld AR, it is apparent that either those are for providing Warranty services or after sales services. When the goods are sold all the price of these items/services are already embedded in the sales price. Naturally when sales price consists of price for warranty and After sales services, which are promised at the time of sales, naturally corresponding expenses are also to be considered while computing the margin of the assessee. After sale support services, training to customers and local staff for troubleshooting and service coordination expenses are thus, required to be included for determining the gross profit margin in resale price method. In view of this, we do not find any infirmity in the order of the ld TPO and CIT(A). Accordingly Ground no. 3 to 5 of the appeal are dismissed.

Issues:
1. Validity of the order of the Commissioner of Income Tax (Appeals)
2. Application of Resale Price Method for determining arm's length price
3. Treatment of expatriate cost in computing Profit Level Indicator
4. Violation of principle of natural justice in providing opportunity for arguments
5. Appropriation of expatriate cost only to the trading business
6. Initiation of penalty proceedings under section 271(1)(c) of the Act

Issue 1: Validity of the order of the Commissioner of Income Tax (Appeals)

The appeal challenged the order of the Commissioner of Income Tax (Appeals) dated December 27, 2016, which partly allowed the appeal against the order of the Deputy Commissioner of Income Tax. The grounds of appeal included challenges to the validity of the order, the discharge of statutory onus by the Assessing Officer, and the violation of natural justice principles. The Appellate Tribunal dismissed the appeal, upholding the order of the Commissioner of Income Tax (Appeals).

Issue 2: Application of Resale Price Method for determining arm's length price

The case involved the application of the Resale Price Method for determining the arm's length price of international transactions. The Transfer Pricing Officer (TPO) considered the Resale Price Method inappropriate and suggested the Transactional Net Margin Method. However, the Commissioner of Income Tax (Appeals) upheld the Resale Price Method chosen by the assessee. The Appellate Tribunal found no infirmity in the decision and dismissed the appeal.

Issue 3: Treatment of expatriate cost in computing Profit Level Indicator

The dispute included the treatment of expatriate costs in computing the Profit Level Indicator (PLI) for the Resale Price Method. The Commissioner of Income Tax (Appeals) directed the inclusion of expatriate costs in computing the gross profit margin, considering the functions performed by the expatriate employees. The Appellate Tribunal upheld this decision, stating that expenses related to after-sale support services and training should be included in determining the gross profit margin under the Resale Price Method.

Issue 4: Violation of principle of natural justice in providing opportunity for arguments

The appeal raised concerns about the violation of the principle of natural justice due to the lack of opportunity for the appellant to present arguments against the approach adopted by the Commissioner of Income Tax (Appeals). However, the Appellate Tribunal did not find any merit in this argument and dismissed the grounds related to this issue.

Issue 5: Appropriation of expatriate cost only to the trading business

The appeal contested the appropriation of expatriate costs solely to the trading business without considering other business activities of the appellant. The Commissioner of Income Tax (Appeals) directed the inclusion of expatriate costs in computing the arm's length adjustment for distribution functions. The Appellate Tribunal upheld this decision, dismissing the appellant's contention.

Issue 6: Initiation of penalty proceedings under section 271(1)(c) of the Act

The appeal challenged the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. The Appellate Tribunal deemed the challenge premature and dismissed the grounds related to this issue.

In conclusion, the Appellate Tribunal dismissed the appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals), upholding the application of the Resale Price Method for determining the arm's length price and the inclusion of expatriate costs in computing the Profit Level Indicator. The Tribunal also dismissed the grounds related to the violation of natural justice principles and the initiation of penalty proceedings.

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