Tribunal allows appeal for ALP adjustment, directs reassessment under section 92C(2) of Income Tax Act

The appeal was allowed for statistical purposes. The Tribunal directed the Assessing Officer to restrict the Arm's Length Price (ALP) adjustment to purchases from the Associated Enterprises (AE) and to reassess the benefit under section 92C(2) of the Income Tax Act. The Assessing Officer was instructed to seek assistance from the Transfer Pricing Officer if needed and to ensure consistency in applying the benefit across different segments.

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Issues Involved:
1. Adjustment in the Arm's Length Price (ALP) of international transactions.
2. Application of the benefit of section 92C(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Adjustment in the Arm's Length Price (ALP) of international transactions:

The primary issue in the appeal was the adjustment of Rs. 2,10,95,333/- made by the Assessing Officer (A.O.) to the ALP of international transactions entered with Associated Enterprises (AEs). The assessee, engaged in the manufacture and sale of textile machinery and related parts, had its case selected for scrutiny, leading to a reference to the Transfer Pricing Officer (TPO) for determining the ALP of international transactions. The TPO identified two segments: auto component and textile machinery. While no adjustment was recommended for the auto component segment, the textile machinery segment showed a discrepancy. The TPO initially computed a higher ALP based on an arithmetic mean margin of 13.32%, which was later corrected to 8.26% after the assessee filed an application under section 154 of the Income Tax Act. The revised adjustment resulted in a shortfall of Rs. 2,10,95,333/-.

The assessee contended that the TPO's methodology was flawed as it applied the ALP adjustment to the total cost, including purchases from unrelated parties. The correct approach, according to the assessee, should restrict the adjustment to the purchases made from the AE, amounting to Rs. 9,75,04,096/-. The Tribunal agreed with this contention, citing the order of the ITAT in the case of Polartech India (P) Ltd. v. Asstt. CIT, which supported the view that adjustments should be confined to the value of transactions with AEs. The Tribunal directed the A.O. to verify the details and confine the adjustment to the purchases made from the AE.

2. Application of the benefit of section 92C(2) of the Income Tax Act, 1961:

The second issue was whether the benefit of the second proviso to section 92C(2) should be granted to the assessee. The proviso allows for a range of (+-) 5% around the ALP without making adjustments. The assessee argued that the TPO failed to provide this benefit in the textile machinery segment, despite granting it in the automotive component segment. The Tribunal noted that the assessee had disclosed segmental details in its TP study report, which the TPO had acknowledged. The Tribunal remitted this issue back to the A.O. for re-adjudication, instructing that if the adjustment falls within the 5% range, the benefit should not be denied. The A.O. was directed to determine any required adjustment and then assess the applicability of the proviso.

Conclusion:

The appeal was allowed for statistical purposes. The Tribunal directed the A.O. to confine the ALP adjustment to the purchases made from the AE and to re-examine the applicability of the benefit under section 92C(2). The A.O. was advised to take the help of the TPO if necessary and to ensure that the benefit provided in the automotive component segment is also considered for the textile machinery segment if applicable.

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