2014 (5) TMI 739 - AT - Income Tax

Addition to total income Transfer pricing adjustment International transaction with AE Export of bathrobes Held that - Following Welspun Zucchi Textiles Ltd. Versus Assistant Commissioner of Income-tax-2(3), Mumbai 2013 (9) TMI 336 - ITAT MUMBAI - the DEPB benefit was not taken into consideration by the AO/TPO for the purpose of working out the profit margin of the assessee whereas such benefit was taken into account in the comparable cases while working out their profit margin as found by the CIT(A) thus, the matter is remitted back to the AO for re-computation of the profit margin of the assessee company after taking into consideration the DEPB benefit as a part of its turnover and to delete the addition made by way of TP adjustment if the difference between the profit margin so computed and the average profit margin of the comparables is found to be within the safe harbor limit of 5% as claimed by the assessee Decided in favour of Assessee. Disposal of appeal of the CIT(A) u/s 143(3) of the Act Directions issued by DRP u/s 144C of the Act Held that - The order of assessment passed u/s 143(3) of the Act in pursuance of the directions of the DRP is not considered as an order appealable before the CIT(A) w.e.f. 1-10-2009 as per the amendment made in the relevant provisions of section 246-A of the Act by the Finance (No.2) Act, 2009 - The appeal filed by the assessee against the order passed by the AO u/s 143(3) of the Act on 30-9-2010 in pursuance of the directions of the DRP was not maintainable before the CIT(A) and the CIT(A) clearly exceeded his jurisdiction in entertaining and disposing of the appeal filed by the assessee the order of the CIT(A) in disposing of the appeal filed by the assessee against the order passed by the AO u/s 143(3) in pursuance of the directions of the DRP is not valid in the eye of law and the same is liable to be cancelled Decided in favour of Revenue.

Summary

Issues involved:
1. Transfer pricing adjustment in respect of international transactions involving export of bathrobes.
2. Validity of the order passed by the CIT(A) in response to the DRP's directions.

Issue 1: Transfer Pricing Adjustment
The primary issue in this case revolved around the addition of Rs. 1,61,00,696 to the total income of the assessee by the Assessing Officer as a transfer pricing adjustment. The assessee, a joint venture engaged in the manufacture and export of bathrobes, had exported bathrobes to its associated enterprise (AE) in Italy. The Transfer Pricing Officer (TPO) rejected the Comparable Uncontrolled Price (CUP) method used by the assessee for benchmarking and instead applied the Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as the Price Level Indicator (PLI). The TPO selected comparables from the capitaline database and determined the arm's length value of the exports to the AE at Rs. 20,16,52,539, leading to the TP adjustment. The Dispute Resolution Panel (DRP) directed the Assessing Officer to make the final assessment order incorporating the TP adjustment.

Issue 2: Validity of CIT(A) Order
The second issue arose from the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] in response to the DRP's directions. The Revenue contended that the CIT(A) had no jurisdiction to entertain and dispose of the appeal against the order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961, as per the amendment in section 246-A. The Tribunal held that the order passed by the Assessing Officer in compliance with the DRP's directions was not appealable before the CIT(A) post the amendment. Consequently, the CIT(A) exceeded his jurisdiction in handling the appeal, leading to the cancellation of the order.

In conclusion, the Tribunal partly allowed the assessee's appeal concerning the TP adjustment issue while allowing the Revenue's appeal regarding the validity of the CIT(A) order. The Tribunal directed the Assessing Officer to recompute the profit margin after considering the DEPB benefit as part of turnover and delete the TP adjustment if the difference falls within the safe harbor limit of 5%.