2021 (2) TMI 675 - AT - Income Tax

TP adjustment on entity level rather than the transactions with the Associated enterprises (AEs) - TNMM - whether on segregate or aggregate approach of international transactions? - HELD THAT - The case of the assessee, with which we concur, is that the transfer pricing adjustment ought to have been restricted to the international transactions rather than the entity level transactions. Section 92 is the first section of the Chapter-X containing special provisions relating to avoidance of tax. Subsection (1) of section 92 provides that Any income arising from an international transaction shall be computed having regard to the arm s length price . Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment are contemplated only in respect of the international transactions and not the entity level transactions. The TPO, in the instant case computed transfer pricing adjustment in respect of entity level transactions and then forgot to restrict it to the international transactions. In a case of combined TNMM, when there are international transactions of the income as well as expenses nature, the transfer pricing adjustment can be made only by considering either the expenses or the incomes. Out of the balance four international transactions under the Manufacturing activity taken by the TPO, three transactions are of expense nature and one is of income nature. As the TPO took the PLI of OP/OR, naturally, the transfer pricing adjustment as per his version could have been in respect of the international transactions of expenses items and he has also proceeded with the costs base rather than the revenue - after finding out the amount of entity level transfer pricing adjustment accordingly, the TPO should have gone further by restricting it to the transactions with the AEs by ascertaining value-wise percentage of such transactions to the total operating costs of the assessee and then applied such percentage to the amount of the entity level transfer pricing adjustment. AR has placed on record a computation of value of the international transactions in the Manufacturing activity , warranting adjustment towards expenses, at ₹ 14.15 crore and also the percentage of such costs to total operating costs of the assessee at 4.26%, thereby working out the proportionate transfer pricing adjustment at ₹ 55,87,148/-. This calculation has not passed through the eyes of the AO/TPO. Under these circumstances, we set aside the impugned order and restore the matter to the file of the AO/TPO for verifying the correctness of the above figures given by the ld. AR and then deciding the issue afresh. Assessee appeal is partly allowed for statistical purposes.

Summary

Issues:
Transfer pricing adjustment, Entity level transactions, International transactions, TNMM method, Arm's Length Price, Operating revenue, Operating costs, Comparable companies, Profit level indicator, Transfer pricing adjustment calculation, Manufacturing activity transactions, Designing & Product Development Charges, Balance sheet items, ALP determination, Dispute Resolution Panel, Appeal to Tribunal.

Detailed Analysis:

Transfer Pricing Adjustment:
The appeal revolves around the transfer pricing addition of ?13,10,50,362/- made by the Assessing Officer (AO). The Tribunal focused on the correctness of the transfer pricing adjustment at the entity level rather than transactions with Associated Enterprises (AEs). The TPO applied the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of international transactions, resulting in the proposed adjustment.

Entity Level Transactions vs. International Transactions:
The Tribunal emphasized that transfer pricing adjustments should be limited to international transactions, not entity level transactions. Section 92 of the Income-tax Act specifies that ALP and transfer pricing adjustments apply only to international transactions. The TPO's approach of calculating adjustments at the entity level was deemed incorrect.

Nature of Transactions and PLI Calculation:
The TNMM was applied to transactions involving both expenses and revenue. The TPO used the PLI of Operating Profit to Operating Revenue ratio of comparables to calculate the adjustment. The Tribunal highlighted the need to segregate expenses and revenue transactions for accurate transfer pricing adjustments.

Designing & Product Development Charges:
A specific issue arose regarding the Designing & Product Development Charges transaction, which was considered a balance sheet item. The Tribunal directed the AO/TPO to verify if this transaction was part of the total figure of Intangible Assets in the Fixed Assets schedule, potentially affecting the transfer pricing adjustment.

Calculation and Adjustment Reassessment:
The TPO's transfer pricing adjustment calculation was challenged for not considering the proportionate adjustment for expenses transactions. The Tribunal set aside the order, instructing the AO/TPO to verify the figures provided by the appellant and make adjustments accordingly. The appellant was granted a hearing in the fresh proceedings.

Conclusion:
The appeal was partly allowed for statistical purposes, emphasizing the need for accurate transfer pricing adjustments based on international transactions. The Tribunal's decision highlighted the importance of adhering to the prescribed methods and considering the nature of transactions for transfer pricing assessments.

Judgment Delivery:
The order was pronounced in the Open Court on 16th February 2021 by the Tribunal, comprising Shri R.S. Syal, Vice President, and Shri S.S. Viswanethra Ravi, Judicial Member. The legal representatives for the Assessee and Revenue were Ms. Pallavi Dinodia and Shri Krishna Kumar Mishra, respectively.