2021 (2) TMI 187 - HC - Income Tax

TP Adjustment - TPO adopted transaction net method or bench marking cost as the profit level indicator and the CIT(Appeals) has confirmed the aforesaid finding - Whether Tribunal erred upholding the Commissioner of Income Tax (Appeals)'s order ignoring the basic mistake therein that having accepted Transaction Net Margin Method and the Profit Level Indicator as OP/TC when the application of the Profit Level Indicator on the total cost is proper and not on the payments made to the Associated enterprises? - HELD THAT - Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to Arms Length Price. Section 92B(1) deals with meaning of international transaction, which means a transaction between two or more associated enterprises either or both of whom are non residents in the nature of purchase, sale or lease of tangible or intangible property or provisions of services or rendering or borrowing money. Section 92C of the Act deals with computation of Arms Length Price. CIT (Appeals) has recorded a finding that since the assessee had earned profit in a technical service segment in contracts other than contracts with SKF and therefore, Transfer Pricing Officer should not have loaded the mark-up on the costs / expenses incurred in meeting the obligations under contracts other than the contracts with SKF on which the assessee had earned a profit of 36% on operating cost. The aforesaid finding of fact has been affirmed in appeal by the tribunal. The aforesaid findings are findings of fact, which have been arrived at by the Commissioner of Income Tax (Appeals) as well as the tribunal on the basis of meticulous appreciation of evidence on record. It is the cardinal principle of law that tribunal is fact finding authority and a decision on facts on the tribunal can be gone into by the High Court only if a question has been referred to it, which says the finding of the tribunal is perverse. SEE SUDARSHAN SILKS SAREES VS. CIT 2008 (4) TMI 5 - SUPREME COURT and MANGALORE GANESH BEEDI WORKS VS. CIT 2008 (4) TMI 5 - SUPREME COURT

Summary

Issues:
1. Interpretation of Transfer Pricing rules under the Income Tax Act, 1961.
2. Application of Arms Length Price computation in international transactions.
3. Correctness of adjustment made by the Transfer Pricing Officer and the Commissioner of Income Tax (Appeals).
4. Findings of the Income Tax Appellate Tribunal and their legal implications.

Detailed Analysis:

1. The primary issue in this case revolves around the interpretation of Transfer Pricing rules under the Income Tax Act, 1961. The appeal was filed by the revenue challenging the decision related to the Assessment year 2004-05. The key question raised was whether the Tribunal correctly upheld the Commissioner of Income Tax (Appeals)'s order concerning the application of the Profit Level Indicator and the Transaction Net Margin Method. The dispute centered on the proper application of these methods in determining the Arms Length Price in international transactions.

2. The application of Arms Length Price computation in international transactions was a crucial aspect of the case. The Tribunal and the Commissioner of Income Tax (Appeals) examined the profits earned by the respondent in technical service segments from contracts other than those with a specific entity. The Transfer Pricing Officer's decision to load mark-up on costs/expenses for contracts other than the specified entity was contested. The contention was that adjustments should only apply to revenues from specific contracts and not the entire segment, especially when the segment is profitable.

3. The correctness of the adjustment made by the Transfer Pricing Officer and subsequently modified by the Commissioner of Income Tax (Appeals) was a key point of contention. The Transfer Pricing Officer had made an adjustment based on the profit margin of independent parties, leading to a significant financial adjustment. However, the Commissioner of Income Tax (Appeals) reduced this adjustment, considering the profitability of the technical service segment from different contracts. The disagreement between the revenue and the assessee regarding the method of adjustment and the correctness of the computation formed a critical part of the legal dispute.

4. The findings of the Income Tax Appellate Tribunal and their legal implications were thoroughly analyzed. The Tribunal dismissed the revenue's appeal, leading to the filing of the current appeal. The High Court emphasized that the Tribunal is a fact-finding authority, and its decisions are only subject to review if they are deemed perverse. The High Court, after detailed consideration of the submissions and records, concluded that no element of perversity was demonstrated. Therefore, the substantial question of law was answered against the revenue and in favor of the assessee, resulting in the dismissal of the appeal.

In conclusion, the judgment delves into the intricate details of Transfer Pricing rules, Arms Length Price computation, adjustments made by tax authorities, and the significance of findings by the Income Tax Appellate Tribunal. The decision highlights the importance of factual findings by the Tribunal and the limited scope of High Court intervention in the absence of demonstrated perversity in those findings.