2024 (1) TMI 1401 - AT - Income Tax

TP Adjustment - Comparability analysis - CIT(A) has issued direction to the Assessing Officer for computing the arithmetic means of the 14 companies for comparing with the margin of the tested parties - HELD THAT - We find that as per section 251 of the Income-tax Act, CIT(A) in appeal against order of the assessment made confirm, reduce, enhance or annul but he can t restore the matter back to the AO. Section 250(4) of the Act prescribe for making any inquiry by himself or he may direct the AO for making further inquiry but in this case no inquiry has been carried out by the CIT(A). Therefore, we are of the opinion that the direction given by the CIT(A) not being in accordance with law, we set aside the finding of the CIT(A) and restore the matter back to him for deciding afresh after providing adequate opportunity of being heard to both the Revenue as well as to the assessee. Ground of appeal of the Revenue and cross objection of the assessee both are allowed for statistical purposes.

Issues:
1. Transfer Pricing Adjustment Deletion
2. Principles of Comparability in Transfer Pricing
3. Selection of Tested Party
4. Comparability Analysis
5. Arm's Length Price Determination
6. Selection of Comparables
7. Direction for Computing Arithmetic Means

Transfer Pricing Adjustment Deletion:
The appeal by the Revenue and cross-objection by the assessee were against the order passed by the Ld. Commissioner of Income-tax-2 for the assessment year 2012-13. The Revenue raised grounds questioning the deletion of the Transfer Pricing adjustment made by the Assessing Officer. The Ld. CIT(A) considered arguments regarding the nature of business activities of the appellant company and the comparables selected by the TPO. The Ld. CIT(A) found the arguments of the appellant acceptable, directing the AO to compute the arithmetic mean with the 14 companies and the supplier that provided material to the appellant. However, the Tribunal held that the direction given by the Ld. CIT(A) was not in accordance with the law, setting aside the finding and remanding the matter back for fresh consideration after providing a hearing to both parties.

Principles of Comparability in Transfer Pricing:
The Revenue questioned the CIT(A)'s failure to appreciate the principles of comparability in transfer pricing, specifically regarding the margin comparison between Indian comparables and the profitability of the assessee's overseas Associated Enterprise. The Tribunal noted the discrepancy in the nature of business activities between the appellant company and the selected comparables, emphasizing the importance of aligning comparables with the actual business operations. The Tribunal highlighted the need for a valid justification for selecting comparables and the relevance of geographical locations in transfer pricing analysis.

Selection of Tested Party:
The issue of selecting the tested party was raised concerning the approval of the foreign Associated Enterprise as the tested party by the CIT(A). The Tribunal emphasized the importance of aligning the tested party with the comparables from the same geographical location, in line with the principles of transfer pricing. The Tribunal noted the necessity of reliable data for foreign comparables when considering a foreign entity as the tested party, as per the relevant provisions of the Income-tax Rules and the Income-tax Act.

Comparability Analysis:
The CIT(A) directed the comparison of the profitability of the foreign Associated Enterprise with that of Indian companies, which was contested by the cross-objectors due to the differing geographical locations. The Tribunal highlighted the invalidity of comparing entities from different geographical locations and stressed the importance of ensuring comparability in terms of functions, assets, and risks when conducting a transfer pricing analysis.

Arm's Length Price Determination:
The CIT(A) and the Revenue disagreed on the determination of the Arm's Length Price (ALP) concerning the selection of comparables and the tested party. The Tribunal noted the need for a thorough analysis considering the nature of business activities and geographical locations to arrive at an accurate ALP. The Tribunal emphasized the importance of following the provisions of the Income-tax Rules and the Income-tax Act in determining the ALP.

Selection of Comparables:
The issue of selecting and using certain Indian companies as comparables for determining the ALP was raised, highlighting the discrepancy in geographical locations between the foreign Associated Enterprise and the Indian comparables. The Tribunal emphasized the need to consider geographical locations when selecting comparables to ensure a valid transfer pricing analysis in line with the relevant provisions of the Income-tax Rules and the Income-tax Act.

Direction for Computing Arithmetic Means:
The CIT(A) issued a direction to the Assessing Officer for computing the arithmetic means of the 14 companies for comparison with the margin of the tested parties. However, the Tribunal found this direction to be not in accordance with the law as it did not involve any further inquiry or investigation. Therefore, the Tribunal set aside the CIT(A)'s finding and remanded the matter back for a fresh decision after providing a hearing to both parties.

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