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2023 (1) TMI 561 - AT - Income TaxTP Adjustment - Adjustment to procurement cost of the appellant (Mirror Transaction Approach) - determination of Arm s Length Price (ALP) of the transactions between the PE with TICB and EDTICB which come within the ambit of International transaction as defined u/s 92B - HELD THAT - Payments made by the assessee PE to its AE s i.e. assessee with TICB and EDTICB were held to be at Arm s Length by this Tribunal 2013 (12) TMI 126 - ITAT MUMBAI ; and since the same international transaction of the instant assessee s procurement cost (being sub-contracting income for the AE s i.e. of assessee viz TICB and EDTICB) has been accepted as Arm s Length for the AE s and the same being mirror transaction cannot be considered excessive in the hands of the assessee/appellant. Therefore, on the same reasoning/ratio of the decision of the Tribunal (Banglore) in UE Development India Pvt. Ltd. 2017 (6) TMI 1381 - ITAT BANGALORE which has been upheld by Hon ble High Court 2018 (8) TMI 2104 - KARNATAKA HIGH COURT we hold that where the Tribunal has accepted the international transaction to be at Arm s Length Price in the hands of AE, then the international transaction that the assessee had with the AE s to be also at Arm s Length Price and therefore no adjustment was warranted in the facts and circumstances of the case. So we allow the ground of the assessee s appeal and direct deletion of Arm s Length Price made as per the impugned order.
Issues Involved:
1. Transfer Pricing Adjustment 2. Determination of Arm's Length Price (ALP) 3. Benchmarking Analysis 4. Scrutiny of International Transactions 5. Mirror Transaction Approach Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue in this case revolves around the Transfer Pricing Adjustment made by the Assessing Officer (AO) following the Dispute Resolution Panel (DRP) direction. The assessee, a foreign company with a project office in India (Permanent Establishment or PE), was involved in a project awarded by M/s. Indian Oil Corporation (IOCL). The project was subcontracted to two associated enterprises (AEs), TICB and EDTICB, which were remunerated by the assessee. The Transfer Pricing Officer (TPO) deemed these remunerations excessive and proceeded to benchmark the transactions to determine if they were at Arm's Length. 2. Determination of Arm's Length Price (ALP): The TPO noted that the assessee failed to produce a Transfer Pricing (TP) study for determining the ALP of the transactions. Consequently, the TPO conducted his own TP analysis using the Transactional Net Margin Method (TNMM) and selected the profit level indicator (OP/OI) to find out the ALP of the payments made. The TPO observed that the profit margin retained by the assessee (5%) was very low compared to industry margins and justified the need for comparable study. The TPO identified five comparable companies and determined an industry average PLI (OP/OI) of 23.49%, leading to an adjustment of Rs. 54,36,55,405/- in the hands of the assessee. 3. Benchmarking Analysis: The TPO's benchmarking analysis involved comparing the net operating margin of the assessee (4.22%) with the industry average (23.49%). The TPO rejected the net operating margin earned by the assessee and adjusted the procurement cost, resulting in an addition to the assessee's income. The assessee challenged this adjustment, arguing that the same transactions had been accepted at Arm's Length in the hands of the associated enterprises. 4. Scrutiny of International Transactions: The Tribunal noted that the scrutiny assessment of the two AEs (TICB and EDTICB) had resulted in the deletion of adjustments by the Tribunal in earlier cases. The Tribunal held that since the payments received by the AEs from the assessee were at Arm's Length, no adjustment was required in the hands of the assessee. The Tribunal relied on the principle that if a transaction is at Arm's Length in the hands of one party, it should be considered at Arm's Length in the hands of the other party as well. 5. Mirror Transaction Approach: The Tribunal emphasized the "Mirror Transaction Approach," where the same transaction, if accepted at Arm's Length in the hands of one party (AEs), should not be adjusted in the hands of the other party (assessee). The Tribunal cited previous decisions, including UE Development India Pvt. Ltd. Vs. DCIT, where it was held that if a transaction is at Arm's Length for one party, it must be at Arm's Length for the other party as well. The Tribunal directed the deletion of the ALP adjustment made in the impugned order, aligning with the principle that the same transaction cannot be treated differently for the two related parties. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the international transactions with the AEs were at Arm's Length, and no adjustment was warranted. The Tribunal's decision was based on the principle that a transaction accepted at Arm's Length for one party should be accepted for the other party as well. All other grounds of appeal became academic and were not adjudicated. The appeal was allowed, and the order was pronounced in the open court.
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