2024 (12) TMI 803 - AT - Income Tax

TP Adjustment - comparability - selection of Tested Party due to difference in the functions of the AE and the assets employed and the risks taken by the assessee - TPO rejected the assessee s segmental results of the AE since he has chosen to consider the assessee as a Tested Party - HELD THAT - No additional evidence has been provided by the assessee before the Ld. CIT(A) in the form of segmental information which was not furnished before the Ld. AO. Therefore, we are unable to accept the contention raised in by the Revenue in its grounds of appeal. We also find that the Ld. CIT(A) has rightly excluded two companies which have exports while arriving at the Arm s Length range. Further, we also concur with the views of the Ld. CIT(A) that the Tested Party M/s. Laila Nutra which is the AE of the assessee can be compared only with the comparables selected by the Ld. TPO as they are functionally broadly similar to that of the AE as a Tested Party. From the arguments placed by the Ld. AR, we find merit in the submissions of the Ld. AR which was considered by the Ld. CI(T(A) and hence we do not find any infirmity in the order of the Ld. CIT(A) thereby dismissing the grounds raised by the Revenue.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Transfer Pricing Adjustment and determination of Arm's Length Price (ALP).
3. Justification of the CIT(A)'s acceptance of additional evidence.
4. Selection of the tested party and comparables for Transfer Pricing analysis.
5. Consistency in the application of Transfer Pricing methods across assessment years.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the Revenue was delayed by 43 days. The Revenue provided an affidavit explaining the reasons for the delay, which included the jurisdictional Range Head holding multiple charges and the time taken to receive comments from the Commissioner of Income Tax (IT & TP), Hyderabad. The Tribunal found the reasons to be reasonable and sufficient, thus condoned the delay and proceeded to adjudicate the appeal on merits.

2. Transfer Pricing Adjustment and Determination of ALP:
The primary issue in the appeal was the Transfer Pricing Adjustment of Rs. 62,25,78,803/- made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) order. The assessee, engaged in manufacturing and exporting herbal extracts, had transactions with its Associated Enterprise (AE), M/s. Laila Nutraceuticals. The assessee used the Comparable Uncontrolled Price (CUP) method and Transactional Net Margin Method (TNMM) for determining ALP, considering its AE as the tested party. The TPO, however, rejected the assessee's analysis, selected the assessee as the tested party, and identified 13 comparables, leading to an ALP adjustment. The CIT(A) later directed the deletion of this adjustment, which the Revenue contested.

3. Justification of the CIT(A)'s Acceptance of Additional Evidence:
The Revenue argued that the CIT(A) admitted additional evidence without giving the AO an opportunity to examine it, violating Rule 46A of the Income Tax Rules. However, the assessee contended that no new evidence was presented, only an extension of details already furnished. The Tribunal noted that the CIT(A) has co-terminus powers with the AO and found no violation of procedural rules, thus rejecting the Revenue's contention.

4. Selection of the Tested Party and Comparables for Transfer Pricing Analysis:
The TPO's decision to consider the assessee as the tested party, contrary to previous years where the AE was the tested party, was challenged. The Tribunal found that the TPO did not provide sufficient justification for this shift, especially since the AE was consistently considered the tested party in prior years. The Tribunal also noted that the comparables selected by the TPO did not have similar export functions as the assessee, which is a 100% export-oriented unit. The CIT(A) correctly identified that the AE should be the tested party, and the comparables should reflect domestic manufacturing functions similar to the AE.

5. Consistency in the Application of Transfer Pricing Methods Across Assessment Years:
The assessee argued for consistency in applying Transfer Pricing methods, as the AE was the tested party in previous years without any change in circumstances. The Tribunal agreed, emphasizing that the TPO failed to demonstrate any material change justifying the deviation in the current assessment year. The CIT(A) rightly upheld the principle of consistency, aligning with prior assessments and rejecting the TPO's approach for the current year.

Conclusion:
The Tribunal upheld the CIT(A)'s order, finding no merit in the Revenue's appeal. The CIT(A) correctly deleted the Transfer Pricing Adjustment, maintained consistency in the tested party selection, and appropriately applied Transfer Pricing methods. The appeal by the Revenue was dismissed.