2018 (1) TMI 752 - HC - Income Tax

TPA - MAM selection - TNMM method application - concession granted to the assessee - addition u/s. 92 on the basis of order of TPO, who had calculated Transfer pricing on the basis of existing data available on record - Held that - After examining the matter, we find that the entire matter has been considered at length and the department does not deny that TNMM method was being used for exporters and, therefore, the resultant concession granted to the assessee on this count is correct. It has also been noticed by the Tribunal that even otherwise the difference in the PLI was only marginal and was below 5%. The question of law is, therefore, answered in favour of the assessee and against the department.

Summary

Issues:
1. Interpretation of Transfer Pricing methods under the Income Tax Act, 1961.
2. Application of TNMM method for computing Arm's Length Price.
3. Consideration of variation in closing stock for determining operating cost.
4. Assessment of comparables' PLI for adjustment purposes.

Analysis:
1. The High Court addressed the controversy in two appeals concerning the rejection of the revenue's appeal without the assessee furnishing details of closing stock attributed to sales to Associated Enterprises (AE) and the addition made under section 92 of the Income Tax Act. The Tribunal clarified that the assessee, an exporter, was incorrectly subjected to the Resale Method (RS) by the Transfer Price Officer (T.P.O) instead of the CUP Method applicable to exporters. The Tribunal emphasized the adoption of TNMM as the appropriate method for computing ALP and requested financial details of comparable companies for assessment purposes.

2. The Tribunal found that the T.P.O had not considered the variation in closing stock while determining the Arm's Length Price using the TNMM method. The CIT (Appeals) acknowledged the error in the T.P.O's calculation and upheld the assessee's position, noting that the PLI of the assessee exceeded the average PLI of comparables. The Tribunal concurred with the CIT (Appeals) decision, confirming the absence of defects in the order and dismissing the department's appeal.

3. The supplementary affidavit revealed minor mistakes in the T.P.O's order, which did not impact the overall assessment. The Tribunal recognized that the TNMM method was suitable for exporters, leading to a concession for the assessee. Despite a marginal difference in PLI below 5%, the Tribunal ruled in favor of the assessee, highlighting the correctness of the concession granted and the negligible impact on the PLI comparison.

4. Ultimately, the High Court dismissed both appeals, affirming the Tribunal's decision and answering the legal question in favor of the assessee. The judgment emphasized the proper application of Transfer Pricing methods, specifically the TNMM method, for exporters and the significance of considering all relevant factors, such as closing stock variations, in determining operating costs and PLI adjustments for accurate assessments under the Income Tax Act.