2019 (12) TMI 32 - AT - Income Tax

TP Adjustment - Cash profit margin - HELD THAT - We hold that albeit the TPO was not legally correct in accepting the Cash profit margin in place of the Operating profit under the TNMM in the remand proceedings, but this issue cannot be raked up in appeal before the Tribunal as the consequential direction of the DRP is based only on the concession of the TPO and not de hors the same. There is no qualitative difference between the two situations, viz., one, in which a legally wrong course of action adopted by the assessee goes unnoticed by the AO/TPO and the order is passed as such, and the two, in which a legally wrong course of action adopted by the assessee comes to the notice of the AO/TPO but the same gets concurrence as correct. Department cannot challenge the action of the AO/TPO directly before the appellate forums. Extantly, we are confronted with the second situation, in which though the acceptance of Cash margin in the determination of the PLI is legally incorrect, but its acceptance by the TPO in the remand proceedings has denuded the Revenue from challenging the same before the Tribunal. This ground, being not maintainable, is dismissed. Granting of custom duty adjustment in the computation of the assessee s PLI rather than that of the comparables - This issue arose for the first time before the DRP. The assessee contended that because of higher volume of imports, it paid additional import duty vis- -vis the comparables paying only the basic custom duty. The assessee furnished calculation of such excess custom duty before the DRP and requested that such excess should be adjusted in the computation of its own PLI. DRP sent such calculation to the TPO for verification and comments. After considering the remand report, the DRP directed to make such adjustment in the assessee s PLI. In sofaras the legal position on this issue is concerned, subclause (i) of rule 10B(1)(e) eloquently provides for computing the net profit margin as realized by the enterprise from the international transaction. Sub-clause (ii) deals with the computation of net operating profit margin from a comparable uncontrolled transaction, may be internal or external. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used for the purposes of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Thus the law explicitly provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin of the assessee. In other words, the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences with the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margins of the comparables. Assessee made a claim before the DRP furnishing necessary details and seeking adjustment in its own profit margin due to Additional custom duty paid because of the excessive imports. The DRP called for a remand report from the TPO on this count. It is on the basis of the above concession given by the TPO himself that the DRP directed to give adjustment on account of additional custom duty paid in the PLI computation of the assessee. Position here is again mutatis mutandis similar to the first issue discussed supra inasmuch as though the direction of the DRP is not legally sound, but the same is based on the concession given by the TPO in the remand proceedings, which has the effect of proscribing the Revenue from agitating this issue in appeal before the Tribunal. This ground of the appeal is also dismissed as not maintainable.

Summary

Issues Involved:

1. Whether the Dispute Resolution Panel (DRP) was correct in law and on facts in directing to allow Cash Profit Level Indicator (PLI) to the assessee.
2. Whether the DRP was right in law and on facts in accepting the contention of the assessee to grant custom duty adjustment in the assessee’s PLI.

Issue-wise Detailed Analysis:

1. Cash Profit Level Indicator (PLI):

The Revenue contended that the DRP erred in allowing Cash PLI for the assessee, arguing that cash profit ratio is not a valid PLI under Indian Transfer Pricing Regulations. The Tribunal analyzed Rule 10B(1)(e) of the Income-tax Act, which mandates the use of "Net Operating Margin" for benchmarking under the Transactional Net Marginal Method (TNMM). The Tribunal emphasized that "Net Profit" or "Operating Profit" must include depreciation as it is an integral part of operating costs. This interpretation was supported by the Supreme Court in DIT (IT) Vs. Morgan Stanley & Company and the Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd.

Despite acknowledging the legal correctness of the Revenue's position, the Tribunal noted that the DRP's direction to adopt Cash PLI was based on a concession by the Transfer Pricing Officer (TPO) during remand proceedings. The TPO, in his remand report, agreed with the assessee's contention for adopting Cash PLI. The Tribunal highlighted that under section 253(2A) of the Act, the Revenue cannot appeal against a direction of the DRP if it is based on a concession by the AO/TPO. Consequently, the Tribunal dismissed the Revenue's ground as not maintainable.

2. Custom Duty Adjustment:

The Revenue challenged the DRP's decision to grant custom duty adjustment in the assessee's PLI instead of the comparables. The Tribunal referred to Rule 10B(1)(e)(iii), which stipulates that adjustments for differences should be made in the profit margins of the comparables, not the assessee. However, the DRP's direction was again based on the TPO's concession during remand proceedings. The TPO, in his remand report, agreed with the assessee's calculation and contention regarding custom duty adjustment.

The Tribunal reiterated that when the DRP's direction is based on the TPO's concession, the Revenue cannot challenge it before the Tribunal. Thus, the Tribunal dismissed this ground of the Revenue's appeal as not maintainable.

Cross Objection by the Assessee:

The assessee's counsel stated that the cross objection would not be pressed if the Departmental appeal was dismissed. Given the dismissal of the Departmental appeal, the cross objection was also dismissed as 'not pressed'.

Conclusion:

The Tribunal dismissed both the Revenue's appeal and the assessee's cross objection. The order was pronounced in the Open Court on 28th November, 2019.