2019 (5) TMI 694 - HC - Income Tax

TP adjustment - benchmarking international transactions of sale of Valves - aggregation of its transactions with the A.E. vs aggregation of its transactions with Non AE - ITAT held difference between the prices charged to A.E. and non A.E. being within the tolerance limit of 5% - HELD THAT - Mr. Suresh Kumar, learned counsel appearing in respect of the appeal submits that the approach adopted by the TPO was correct approach. However, he is not able to point any flaw in the approach of the CIT (A) and the Tribunal in adopting the aggregated approach in the present facts. Thus, the view taken by the Tribunal of determining the ALP of sales to AE on the comparison of the aggregation of AE and non AE transactions (taking its arithmetical mean) does not call for any interference. No substantial question of law. TP Adjustment on export of Valves - Valves in Kit form to its AE in USA viz. Flow Serve Sulphur Spring (Flow Serve) - ITAT held that TPO had clearly made a fundamental error in determining the ALP of sales of vales and kits made to Flow Serve by comparing its margin with other sales by the respondent to its AEs in different parts of the world - HELD THAT - We note that Chapter X of the Act is a special provision relating to avoidance of tax. Section 92 deals with computation of income from international transaction having regard to ALP. It provides any income arising from the international transaction shall be computed having regard to the ALP. The ALP is defined under Section 92F(ii) to mean a price which is applied or proposed to be applied in transactions between persons other than AE's in uncontrolled transactions. This is further supported by Rule 10A(d) where uncontrolled transaction has been defined as a transaction between enterprises other than with A.E's. whether resident or non-resident. In view of the above clear position in law, the TPO ought to have arrived at the ALP of the respondent's sale to its A.E.viz. Flow Serve by only comparing it with uncontrolled transaction of sale to in USA. Thus the approach of the TPO is contrary to the clear provisions of law. Besides as held by the Tribunal the comparison has to be region /country specific, which in this case, the TPO has completely ignored. Therefore, the view taken by the Tribunal does not call for any interference as it is in accordance with the self evident provisions of law - No substantial question of law.

Summary

Issues:
1. Transfer pricing adjustment on sale of Valves to Associated Enterprise (AE).
2. Transfer pricing adjustment on export of Valves and Valves in Kit form to AE in USA.

Issue 1: Transfer pricing adjustment on sale of Valves to Associated Enterprise (AE)

The appeal challenges an order by the Income Tax Appellate Tribunal regarding the Assessment Year 2004-05. The primary question raised is whether the Tribunal was justified in upholding the CIT (A) order benchmarking international transactions of Valves sale to the AE, L & T LLC, by aggregating all transactions with the AE and comparing them with non-AE transactions. The respondent, a joint venture company, sells industrial valves to group companies and others. The TPO made an upward revision based on selective comparison of prices charged to AE and non-AE, leading to an adjustment by the Assessing Officer. The CIT (A) allowed the appeal, stating that aggregation of AE and non-AE transactions is necessary to determine the ALP. The Tribunal upheld the CIT (A) decision, emphasizing the need to aggregate all transactions with AE and non-AE separately to determine ALP. The appeal by the revenue was dismissed as the Tribunal's approach was found to be correct and in line with the law.

Issue 2: Transfer pricing adjustment on export of Valves and Valves in Kit form to AE in USA

During assessment proceedings, it was noted that the respondent exported valves and kits to the AE, Flow Serve Sulphur Spring, USA, at a loss. The TPO adjusted profit margins of similar supplies to group companies to revise the sales price to Flow Serve. The CIT (A) held that comparables were not accepted without proper justification and that comparing transactions with AEs in different countries is not valid. The Tribunal found a fundamental error in the TPO's approach, stating that ALP determination should involve comparing transactions with uncontrolled parties in the same region/country. The Tribunal upheld the CIT (A) decision, emphasizing the need for region-specific comparisons as per the law. The Tribunal's decision was deemed correct and in accordance with the law, leading to the dismissal of the revenue's appeal.

In conclusion, the High Court of Bombay dismissed the appeal in both issues, emphasizing the importance of proper ALP determination and region-specific comparisons in transfer pricing adjustments. The judgments by the CIT (A) and the Tribunal were upheld as being in accordance with the provisions of the Income Tax Act.