2018 (6) TMI 1861 - HC - Income Tax

TP Adjustment - Tribunal justification in directing the AO/TPO to benchmark only the AE transactions without appreciating that the assessee itself in its transfer pricing study report (TPSR) has chosen entity level PLI to benchmark the AE transactions - HELD THAT -Issue raised herein stands concluded against the Revenue by the decision in Assessee s own case 2018 (6) TMI 452 - BOMBAY HIGH COURT relating to Assessment Year 2005-06 and also 2015 (11) TMI 1628 - BOMBAY HIGH COURT relating to Assessment Year 2008-09. Tribunal justification in directing the AO/TPO to include M/s. Tirumalai Chemicals Ltd. as one of the comparable - We find that it is not disputed before us that products sold by Assessee to AE as well as products manufactured by M/s. Tirumalai Chemicals Ltd. would fall under the category of specialty chemicals. It is in this context that the TNMM has been invoked as the most appropriate method. Further the impugned order 2014 (12) TMI 382 - ITAT MUMBAI of Tribunal has found that the capacity utilization by the both M/s. Tirumalai Chemicals Ltd., as well as by the Respondent Assessee Is approximately the same. Thus on facts the view taken by the Tribunal is a possible and a reasonable view. Tribunal directing that the provisions pertaining to earlier year but written back during the current year be treated as operational income of the current year - Tribunal has upheld the order of the DRP that the provisions pertaining to the earlier years written back in the subject Assessment Year would be in the nature of operating income. Thus not exclude able while determining the operating profits. The impugned order of the Tribunal places reliance upon the orders in the case of Zee Entertainment Enterprises Pvt. Ltd. 2014 (8) TMI 1035 - ITAT MUMBAI wherein it was held that provisions of writing back were to be considered as operating revenue if an uniform approach is adopted unless of course any contrary material is brought on record. Revenue has not even made any attempt to point out why the reasoning of the Tribunal in Zee Entertainment (supra) was incorrect or that it was not applicable to the present facts. Appeal dismissed. No substantial question of law.

Summary

ISSUES PRESENTED and CONSIDERED

The legal judgment from the Bombay High Court considered the following core legal questions:

(a) Whether the Tribunal was justified in directing the Assessing Officer/Transfer Pricing Officer (AO/TPO) to benchmark only the Associated Enterprise (AE) transactions, despite the assessee's transfer pricing study report using an entity-level Profit Level Indicator (PLI) to benchmark the AE transactions.

(b) Whether the Tribunal was justified in including M/s. Tirumalai Chemicals Ltd. as a comparable entity, despite the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) finding it functionally different.

(c) Whether the Tribunal erred in directing that provisions from earlier years, written back in the current year, be treated as operational income for the current year, contrary to the requirement that benchmarking for transfer pricing purposes should be based solely on the current year's operational profits.

ISSUE-WISE DETAILED ANALYSIS

Re Question (a):

Relevant legal framework and precedents: The issue relates to the appropriate method for benchmarking AE transactions under the Income Tax Act, 1961. The Court referenced its own previous decisions in the respondent assessee's case for prior assessment years, which had established the precedent for this issue.

Court's interpretation and reasoning: The Court noted that the issue had been conclusively resolved against the Revenue in previous rulings involving the same parties and similar circumstances. The Tribunal's decision was consistent with these precedents.

Conclusions: The Court concluded that the question did not raise any substantial question of law, as it had already been settled in earlier cases. Thus, it was not entertained.

Re Question (b):

Relevant legal framework and precedents: This issue involves the determination of comparables for the purpose of the Transaction Net Margin Method (TNMM) under the transfer pricing regulations.

Court's interpretation and reasoning: The Tribunal had found that both the respondent and M/s. Tirumalai Chemicals Ltd. were engaged in the manufacture of specialty chemicals. Despite differences in capacity utilization, the Tribunal deemed them comparable. The Court observed that the Tribunal's view was reasonable and based on the factual context.

Key evidence and findings: The Tribunal noted that the capacity utilization for both entities was approximately similar, which supported the inclusion of M/s. Tirumalai Chemicals Ltd. as a comparable.

Conclusions: The Court determined that the Tribunal's decision was a plausible interpretation of the facts and did not raise a substantial question of law. Therefore, the question was not entertained.

Re Question (c):

Relevant legal framework and precedents: The issue pertains to the classification of provisions written back from previous years as operational income. The Tribunal relied on its prior decision in the case of Zee Entertainment Enterprises Pvt. Ltd., which established that such provisions should be considered operational revenue if a uniform approach is adopted.

Court's interpretation and reasoning: The Court noted that the Revenue did not challenge the Tribunal's reasoning in the Zee Entertainment case, nor did it present any contrary material. The Tribunal's decision was consistent with its established approach.

Conclusions: The Court found no substantial question of law arising from this issue and did not entertain the question.

SIGNIFICANT HOLDINGS

Core principles established: The judgment reinforced the principle that issues previously settled by the Court in similar cases do not give rise to new substantial questions of law. It also affirmed the Tribunal's discretion in determining comparables based on a reasonable interpretation of facts and established the treatment of provisions written back as operational income when a uniform approach is applied.

Final determinations on each issue: The Court dismissed the appeal, holding that none of the questions raised substantial questions of law. The Tribunal's decisions on all issues were upheld.