2019 (11) TMI 360 - AT - Income Tax

TP Adjustment - proportionate difference for purpose of calculation of /- 5% benefit as against the actual difference between the Arms Length Price determined and amount shown in the books of accounts - HELD THAT - After passing of the second rectification order, the final TP adjustment as per the Assessing Officer comes to ₹ 4,10,82,596/- which is 3.86% of the operating cost of the manufacturing segment. Therefore, the adjustment in international transactions being less than 5% of the total international transactions is deemed to be at ALP as per second proviso to sub-section (2) of section 92 of the IT Act. We, therefore, do not find any infirmity in the order of the CIT(A) in directing the A.O./TPO to delete the addition. The ground raised by the Revenue, in our opinion, is without any merit. The various decisions relied on by the ld. counsel also support its case that TP adjustment made under TNMM is not warranted when the value of the international transaction of purchase of raw material and the proportionate arm s length operating cost falls within the /- 5% arm s length range. We further find that the TPO in the instant case has passed rectification order twice i.e., the first one on 19th August, 2014 and the second one on 12th March, 2015 and finally reduced the TP adjustment from 11,09,72,200/- to ₹ 4,10,82,956/-. We, therefore, find merit in the argument of the appeal filed by the Revenue should be dismissed being infructuous since the variation between the ALP so determined and the price at which the international transaction has actually been undertaken does not exceed 5%. The grounds raised by the Revenue are accordingly dismissed.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) for international transactions.
2. Adjustment of Transfer Pricing (TP) based on proportionate difference.
3. Applicability of +/- 5% benefit as per second proviso to section 92C(2) of the IT Act.
4. Validity of rectification orders passed under section 154/143(3) of the IT Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:

The assessee, engaged in manufacturing and trading of car A/C components, filed its income tax return declaring a loss. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for computation of ALP of international transactions. The TPO initially proposed adjustments based on 27 comparables, determining the ALP at 7.05%. The TPO excluded non-operating income/expenses, proposing an adjustment of ?11,09,72,200.

2. Adjustment of Transfer Pricing (TP) based on proportionate difference:

The assessee filed appeals and rectification applications, arguing that the TP adjustment should be proportionate to the international transaction of the manufacturing segment. The TPO, in the rectification order dated 16th July 2014, reduced the adjustment to ?6,58,73,098, and further to ?4,10,82,596 on 12th March 2015, based on the proportionate difference.

3. Applicability of +/- 5% benefit as per second proviso to section 92C(2) of the IT Act:

The assessee contended that the adjustment of ?4,10,82,596, which is 3.86% of the operating cost of the manufacturing segment, falls within the +/- 5% range of the total international transactions. The CIT(A) agreed, stating that no adjustment is required as per the second proviso to section 92C(2), deeming the international transaction to be at ALP.

4. Validity of rectification orders passed under section 154/143(3) of the IT Act:

The TPO passed two rectification orders, reducing the TP adjustment from ?11,09,72,200 to ?4,10,82,596. The CIT(A) upheld the assessee's argument that the adjustment within the +/- 5% range is valid and no further adjustment is necessary. The Tribunal found no infirmity in CIT(A)'s order, supporting the assessee's case with relevant decisions, and dismissed the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the final TP adjustment of ?4,10,82,596, being 3.86% of the operating cost, falls within the permissible +/- 5% range, and thus, no adjustment is warranted. Consequently, the Cross Objection filed by the assessee was also dismissed as infructuous. The decision was pronounced in the open court on 22.10.2019.