2023 (10) TMI 697 - AT - Income Tax

TP Adjustment - MAM - most appropriate method selection - RPM or Other method - DRP upheld the most appropriate method as the resale price method - assessee has raised new plea of adopting other method as the most appropriate method - HELD THAT - Assessee is a limited risk distributor. Based on this FAR, assessee in its transfer pricing study report placed at page number 35 of the report stated that out of the 52,215 companies capitaline the only company which could be considered a similar to the assessee was Brahmos aerospace private limited which was also rejected for non-availability of the latest available data in public domain. One more reason was given that company owned significant intangible and technology of developing missiles. Also stated to be a full-fledged manufacturer. In the end it was stated that the gross profit margin of the assessee at 7.84% is stated to be at arm s-length for the reason that the contract is in essence between two governments therefore it was held to be reasonable to conclude that the international transactions entered into by the associated enterprise with its associated enterprise is at arm s-length. We find that even if the resale price method is adopted, in absence of comparable, the comparability analysis fails. Thus there is no use of adoption of most appropriate method as resale price method. Assessee has also stated that in such cases the other method is the most suitable method for benchmarking the international transaction by considering the last purchase price of the similar items which are negotiated between the two governments. Considering the facts and circumstances of the case, we set-aside the whole issue back to the file of the learned TPO/assessing officer to benchmark above international transaction by adopting either resale price method , if adequate comparability data is available, or other method as the most appropriate method. Also duty of the assessee to substantiate before the AO/TPO to show that the international transaction entered into with its associated enterprise are at arm s-length based on certain credible information.

Summary

Issues Involved:

1. Validity of the final assessment order.
2. Upward adjustment to the total income.
3. Segmentation and computation of margins.
4. Violation of natural justice.
5. Benchmarking approach.
6. Principle of Res-judicata.
7. Initiation of penalty proceedings.
8. Addition on account of AIR Mismatch.

Summary:

1. Validity of the Final Assessment Order:
The assessee challenged the final assessment order dated 24 October 2018, arguing it is "bad in law and void ab-initio." The Tribunal did not explicitly address this issue in the final ruling.

2. Upward Adjustment to the Total Income:
The Tribunal examined the upward adjustment of Rs. 11,29,97,681/- made by the AO/DRP/TPO, holding that the transactions of purchase and payment for services were not at arm's length. The assessee argued that the Ministry of Defense (MoD) and the Russian Federation's stringent controls preclude excessive profits, and the TPO's benchmarking violated Section 92(3) of the Income Tax Act, 1961. The Tribunal directed the AO/TPO to reconsider the benchmarking method, accepting the resale price method (RPM) or 'other method' if adequate comparability data is unavailable.

3. Segmentation and Computation of Margins:
The assessee objected to the AO/DRP/TPO's splitting of business into trading and service segments and the methodology used to compute margins. The Tribunal noted that the assessee's business activities are composite and interlinked, and directed the AO/TPO to re-examine the segmentation and margin computation, considering the foreign exchange fluctuation loss and liquidated damages as non-operating expenditures.

4. Violation of Natural Justice:
The assessee claimed that the AO/DRP/TPO violated the principle of natural justice by not providing complete information/benchmarking analysis. This ground was not pressed by the assessee and was dismissed by the Tribunal.

5. Benchmarking Approach:
The Tribunal found that the AO/DRP/TPO erred in cherry-picking comparable companies for benchmarking, which were functionally different from the assessee's profile. The Tribunal directed the AO/TPO to adopt either the RPM or 'other method' for benchmarking the international transactions afresh.

6. Principle of Res-judicata:
The assessee argued that the modus operandi has not changed over the years and was accepted in previous assessments. The Tribunal did not specifically address this issue but implied that the AO/TPO should consider past assessments while re-evaluating the benchmarking method.

7. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income was deemed premature and was dismissed by the Tribunal.

8. Addition on Account of AIR Mismatch:
The AO made an addition of Rs. 7,51,252/- due to an AIR mismatch. The Tribunal did not specifically address this issue in the final ruling.

Conclusion:
The Tribunal set aside the transfer pricing adjustment issues back to the AO/TPO for fresh benchmarking, adopting either the RPM or 'other method' based on credible information. The appeal was partly allowed for statistical purposes.