2022 (8) TMI 802 - AT - Income Tax

TP Adjustment - MAM - Assessee benchmarked using cost plus method (CPM) - rejecting the method TPO applied Transactional Net Margin Method (TNMM) to benchmark these transactions - HELD THAT - Assessee is 100% EOU and its profits are exempt. The entire products are sold to joint venture entities outside. In such a case, there would be no incentive for the assessee to shift its profits outside India. Further, the assessee is a contract manufacturer and do not carry out marketing functions. The entire risk is borne by the Associated Entities. The sale transactions have been benchmarked using cost plus method (CPM) which would be Most Appropriate Method considering the functions of the assessee. It is also undisputed fact that similar methodology as adopted by the assessee in other years has been accepted by Ld. TPO. Therefore, TNMM method could not be applied to the case of the assessee. The issue has rightly been adjudicated by Ld. CIT(A) in the impugned order. Adjustment made for import of raw material - as alleged that the price paid by the assessee was higher than the cost from original supplier. Therefore, Resale Price Method (RPM) as adopted by the assessee was rejected and Comparable Uncontrolled Price (CUP) method was adopted to arrive at this adjustment. However, it could be seen that the assessee did not resell the components thus purchased to any third parties and the components were utilized for manufacturing of goods exclusively for sale as finished goods to Associated Enterprises (AE) by adding its own margin. In such a case, RPM method was to be accepted and comparison of price of raw material sold by the AE to other parties could not be the basis of adjustment. On this score also, no infirmity could be found in the impugned order. - Decided against revenue.

Summary

Issues:
1. Transfer pricing adjustments for Assessment Year 2004-05
2. Condonation of delay in appeal

Analysis:
1. Transfer pricing adjustments for Assessment Year 2004-05:
The appeal by the Revenue for Assessment Year 2004-05 was based on the order of the Commissioner of Income Tax (Appeals) dated 23-03-2016. The Revenue contended that the CIT(A) erred in not making transfer pricing adjustments for the year 2004-05 despite the assessee being in the same line of business as in subsequent years. The Revenue argued that each assessment year is independent and not dependent on previous years' proceedings. Additionally, the Revenue highlighted a pending Special Leave Petition (SLP) filed by the Department challenging a decision of the Karnataka High Court. The Tribunal found in favor of the assessee, noting that the assessee, being a 100% Export Oriented Unit (EOU), had no incentive to shift profits outside India. The Tribunal upheld the CIT(A)'s decision to delete the proposed adjustments, considering the functions and methodology adopted by the assessee, which had been accepted in previous years by the Transfer Pricing Officer.

2. Condonation of delay in appeal:
The Registry noted a delay of 16 days in the appeal, which the Revenue sought condonation for. The Tribunal, considering the period of delay, condoned the delay and admitted the appeal for adjudication on merits. This procedural aspect was resolved, allowing the appeal to proceed for substantive review.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decision of the CIT(A) to delete the transfer pricing adjustments for Assessment Year 2004-05. The Tribunal found that the methodology adopted by the assessee, being a 100% EOU, was appropriate and consistent with previous accepted practices. The Tribunal also addressed the procedural issue of delay in the appeal, condoning the delay and allowing the appeal to be heard on its merits.