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2023 (4) TMI 1090 - AT - Income TaxTP adjustment - international transaction of Payment of Management fees with transacted value - HELD THAT - Here is a classic case in which the TPO did not compute the ALP of the international transaction but simply proposed the transfer pricing adjustment on the basis of some working done by him to the value of international transaction. The course of action adopted by the TPO has no sanction of law inasmuch as it is mandatory to determine the ALP under one of the six prescribed methods for ascertaining if the international transaction was at ALP. Further, a common thread running through all the six methods is that the benchmark always has a reference to the comparable uncontrolled transactions. TPO dispensed with the adoption of any of the methods. Neither any comparison of the Payment of Management Fee in an uncontrolled situation was made nor even the allocation of the third component on the basis of head count was done by considering any comparable uncontrolled instance. Such a course of action adopted by the TPO is contrary to the mandatory statutorily stipulated procedure and hence, cannot be countenanced. If the working of the TPO, which is not in accordance with the law, is removed from the scene, what remains is the ALP determination done by the assessee of the international transaction of its Transfer pricing study report. Such determination has not been adversely commented upon by the TPO, which, ergo has to be accepted as correct. ALP determined by the assessee in its Transfer pricing study report deciphers that the transaction was carried out at the ALP - Thus delete the addition made in the international transaction of Payment of Management Fee . Appeal of assessee allowed.
Issues:
1. Transfer pricing adjustment in the international transaction of 'Payment of Management fees' Analysis: 1. The appeal challenged the final assessment order passed by the Assessing Officer regarding the transfer pricing adjustment in the international transaction of 'Payment of Management fees' for the assessment year 2016-17. 2. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the transaction. The TPO analyzed the allocation of Management Fees paid by the assessee to its Associated Enterprise (AE) under various heads and proposed an adjustment of Rs.2.89 crore based on his working of cost allocation. 3. The TPO's adjustment was based on reworking the cost allocation on the basis of sales ratio rather than head count, which the TPO deemed inappropriate. The TPO's methodology for determining the allowable and disallowed costs was not in line with the prescribed methods for determining ALP under Chapter X of the Income-tax Act. 4. The relevant provisions of Chapter X of the Act require any income arising from an international transaction to be computed at the Arm's Length Price (ALP). The TPO's failure to determine the ALP under the prescribed methods and his deviation from the comparison with uncontrolled transactions rendered his approach contrary to the statutory procedure. 5. The assessee had computed the ALP of the international transaction in its Transfer Pricing Study Report, showing the transaction at ALP. The TPO's analysis did not challenge the ALP determination by the assessee, which indicated that the transaction was carried out at ALP. 6. The Tribunal held that the TPO's methodology for proposing the transfer pricing adjustment lacked legal sanction as it did not involve determining the ALP under the prescribed methods. The Tribunal set aside the adjustment of Rs.2.89 crore in the international transaction of 'Payment of Management Fee' and ordered its deletion. 7. The decision emphasized the importance of following the statutory provisions and prescribed methods for determining the Arm's Length Price in international transactions to ensure compliance with transfer pricing regulations. 8. The appeal was allowed, and the order to delete the addition of Rs.2.89 crore in the international transaction of 'Payment of Management Fee' was pronounced in the Open Court on 01st February, 2023.
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