2021 (3) TMI 229 - AT - Income Tax

TP adjustment only to the international transactions - dispute is for restricting the transfer pricing adjustment to the international transactions alone and not extending it to the entity level transactions - HELD THAT - Section 92 is first section of the Chapter-X containing special provisions relating to avoidance of tax. Sub-section (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 (with AEs) and not the entity level transactions (which also include transactions with non-AEs). The TPO, in the instant case has computed transfer pricing adjustment in respect of entity level transactions, which cannot be countenanced. We, therefore, direct to restrict the transfer pricing adjustment only to the international transactions rather than the entity level transactions, of course, after giving due opportunity of hearing to the assessee. Calculation of PLI - What is essential to consider is the PLI computation of the comparable at the time of the passing of the original order by the TPO for ensuring that VRS expenses did not form part of the cost base as contended. The ld. AR did not readily have such a copy of the working of the PLI of the company by the TPO. We set-aside the impugned order and restore the matter to the file of AO/TPO with a direction to include VRS costs incurred by Veejay Laskshmi Engineering Works Ltd. in its operating cost base, if not already included, in the same manner as has been done in the case of the assessee and thereafter to compute the operating costs and the consequential operating profit. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.

Summary

Issues:
1. Transfer pricing adjustment limited to international transactions.
2. Treatment of VRS expenses in operating cost base.

Issue 1: Transfer pricing adjustment limited to international transactions

The appeal was against the final assessment order concerning the assessment year 2013-14. The dispute revolved around restricting the transfer pricing adjustment to international transactions only. The assessee, an Indian company, engaged in textile machinery manufacturing, had reported international transactions in Form No. 3CEB. The TPO proposed a transfer pricing adjustment based on external TNMM, resulting in a significant adjustment. The contention was that the adjustment should apply only to international transactions, not entity-level transactions. The tribunal held that as per Section 92 of the Income-tax Act, transfer pricing adjustments are intended for international transactions only, not entity-level transactions. The tribunal directed the adjustment to be restricted to international transactions, providing the assessee with a hearing opportunity.

Issue 2: Treatment of VRS expenses in operating cost base

An additional ground raised was the treatment of VRS expenses in the operating cost base. The assessee argued that VRS expenses should be considered in the operating cost base for both the assessee and the comparable company, Veejay Lakshmi Engineering Works Ltd. The tribunal admitted this ground based on legal precedence. The TPO had included VRS expenses in the operating costs of the assessee but not in the case of the comparable company. The tribunal emphasized that similar expenses should be treated consistently across comparable companies. Upon review, it was found that Veejay Lakshmi Engineering Works Ltd. had not included VRS expenses in its operating cost base. Therefore, the tribunal set aside the order and directed the inclusion of VRS costs for the comparable company in a manner consistent with the assessee, providing a hearing opportunity. The appeal was partly allowed based on these findings.

In conclusion, the tribunal's judgment addressed the issues of limiting transfer pricing adjustments to international transactions and ensuring consistent treatment of VRS expenses in the operating cost base for the assessee and comparable companies. The decision provided clarity on the application of transfer pricing rules and the treatment of specific expenses in determining operating profit margins.