2024 (9) TMI 849 - AT - Income Tax

Validity of order passed u/s 143(3) r.w.s. 144C - TP Adjustment - rejection of aggregation approach as adopted by the appellant and rejection of comparables of the ld. TPO - as argued TPO had not considered the direction of the Hon ble DRP, so section 144C(13) will be applied for contravening the direction of the Hon ble DRP - A.R. argued that ld. TPO rejected the aggregation approach adopted by the appellant and held that the said transaction needs to be benchmarked separately. HELD THAT - In our factual consideration, we find that the ld. TPO has passed the rectified order u/s 92CA(3) r.w.s. 144C(5) in pursuance of the direction of the Hon ble DRP. We accordingly fully rely on the order of Hon ble DRP. The method taken by the assessee, i.e. TNMM should be taken instead of ROCE and the aggregation method will be applicable for the TP Study. We further direct that the matter should be remitted back to the file of ld. TPO/AO for further adjudication on the two issues as directed above and the comparables should be taken by considering the Rule of Consistency. No such comparable is allowed in TP study related to the transaction of purchase of raw material and consumables and export of finished goods. TPO should follow the direction of Hon ble DRP and the issue of purchase of fixed assets applicability of ROCE will not be accepted and ld. TPO should make a separate re-workings of the margin, vis-a-vis the international transaction of purchase of fixed assets pursuant to the rejection of comparables of DRP s direction as retained the original transfer pricing adjustment vis-a-vis impugned transaction of purchase of fixed assets. In our considered view, the matter is restored to the file of ld. TPO/AO for further calculation of TP adjustment by considering the direction of the Hon ble DRP. Appeal of the assessee allowed for statistical purposes.

Issues Involved:
1. Legality of the order under section 143(3) read with section 144C of the Income Tax Act, 1961.
2. Adjustment with respect to payment of Cylinder Rental Charges.
3. Rejection of economic analysis for the purchase of fixed assets.

Issue-wise Detailed Analysis:

1. Legality of the Order:
The appellant challenged the order dated 19 December 2016, which was subsequently rectified on 10 March 2017, arguing that it was arbitrary, erroneous, perverse, and contrary to law. The appellant contended that the Assessing Officer (AO) erred in making a reference under section 92CA to the Transfer Pricing Officer (TPO) without recording objective satisfaction as required under section 92CA and/or section 92C(3). The Dispute Resolution Panel (DRP) did not hold the TPO's order and the draft assessment order void ab initio despite the appellant's claim that the conditions of section 92C(3) and the requirement of recording objective satisfaction under section 92CA(1) were not met.

2. Adjustment with Respect to Payment of Cylinder Rental Charges:
The appellant argued that the transfer pricing adjustment proposed by the TPO of INR 56,00,556/- in respect of cylinder rental charges was erroneous and contrary to law. The appellant had benchmarked the transaction using the "aggregation approach" under the Transactional Net Margin Method (TNMM), concluding that the international transactions, including cylinder rental charges, were at arm's length. The TPO rejected the aggregation approach and benchmarked the transaction separately, applying the same set of comparables used for other transactions. The DRP rejected the TPO's observation related to the rejection of the aggregation approach and comparables.

3. Rejection of Economic Analysis for Purchase of Fixed Assets:
The appellant contended that the authorities arbitrarily, erroneously, and wrongly disregarded the principle of "Aggregation of Transactions" and failed to consider that the computation of the arm's length price should have been made using TNMM. The TPO applied the Return on Capital Employed (ROCE) as the Profit Level Indicator (PLI) for benchmarking the transactions, which the appellant argued disregarded the commercial use of such assets in its business operations. The DRP rejected the TPO's approach and upheld the appellant's method of aggregation and application of TNMM. The DRP directed that the import/export of capital assets should be considered in aggregation and not in isolation.

Detailed Judgment:
The appellant's transactions with its Associated Enterprises (AE) were benchmarked using TNMM, with the operating margin (OP/Sales) of 13.07% being higher than the comparables' margin of 4.05%. The TPO proposed adjustments of INR 56,00,556/- for cylinder rental charges and INR 6,86,42,156/- for the purchase of fixed assets. The DRP accepted the appellant's submission, rejecting the TPO's use of ROCE and the separate benchmarking approach.

The DRP emphasized the principle of consistency, noting that the TPO had accepted similar transactions as arm's length in preceding years. The DRP upheld the use of single-year data and rejected the TPO's fresh search for comparables, emphasizing that the transactions should be benchmarked in aggregation. The DRP directed the TPO to follow its instructions and apply TNMM instead of ROCE.

The Tribunal, after hearing the arguments, directed that the matter be remitted back to the TPO/AO for further adjudication on the two issues, following the DRP's directions. The Tribunal emphasized the need for consistency in selecting comparables and rejected the TPO's application of ROCE for the purchase of fixed assets. The Tribunal restored the matter to the TPO/AO for recalculating the transfer pricing adjustment, considering the DRP's directions.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with the Tribunal directing the TPO/AO to rework the transfer pricing adjustments in line with the DRP's directions, emphasizing the use of TNMM and the aggregation method. The order was pronounced in open court on 19/02/2024.

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