Assessee's Appeal Partially Allowed, Reopening Deemed Invalid. TNMM Analysis Upheld. Upward Adjustment Recalculated.

M/s Greenland Exports Private Ltd. Versus The Assistant Commissioner of Income Tax, Company Circle II(2), Chennai

M/s Greenland Exports Private Ltd. Versus The Assistant Commissioner of Income Tax, Company Circle II(2), Chennai - TMI Issues Involved:
1. Upward adjustment to the arm's length price (ALP) in respect of sales to associate enterprises (AEs).
2. Jurisdiction for resorting to re-assessment under Section 147 of the Income-tax Act, 1961.
3. Appropriateness of the method used for transfer pricing analysis.
4. Validity of re-opening the assessment.
5. Application of safe harbour rules.

Detailed Analysis:

1. Upward Adjustment to the Arm's Length Price (ALP):
The assessee's primary grievance was the upward adjustment of Rs. 1,25,85,937/- to the ALP for sales to its AEs. The assessee claimed it used the Transactional Net Margin Method (TNMM) for internal comparables, but the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) relied on external comparables. The TPO selected external comparables, M/s Kariwala Industries Ltd. and M/s Meenakshi (India) Ltd., resulting in an average margin of 11.29%, significantly higher than the assessee's 3.91%. The DRP later restricted the upward adjustment to Rs. 1,25,85,937/- after excluding one comparable.

2. Jurisdiction for Resorting to Re-assessment:
The assessee contested the jurisdiction for re-assessment, arguing that the reasons recorded for reopening did not satisfy Section 147 of the Income-tax Act. The reopening was based on the fact that the value of international transactions exceeded Rs. 15 Crores, necessitating compulsory scrutiny. The Tribunal found this reason insufficient, emphasizing that the Assessing Officer (A.O.) must have a reason to believe that income chargeable to tax had escaped assessment, which was not demonstrated in this case.

3. Appropriateness of the Method Used for Transfer Pricing Analysis:
The TPO rejected the assessee's internal TNMM analysis, arguing it could not be applied with internal comparables and that only the Comparable Uncontrolled Price (CUP) method was appropriate. The DRP supported this view, noting that indirect costs could not be uniformly allocated based on turnover. However, the Tribunal found that the internal TNMM analysis was valid, especially since the indirect expenses were minimal compared to direct expenses. The Tribunal cited the decision in Birlasoft (India) Ltd. v. DCIT, supporting the use of internal comparables for TNMM.

4. Validity of Re-opening the Assessment:
The Tribunal scrutinized the validity of reopening the assessment. It referenced the judgments in Rajesh Jhaveri Stock Brokers (P) Ltd. and CIT v. Kelvinator of India Ltd., which clarified that the A.O. must have a tangible reason to believe that income had escaped assessment. The Tribunal concluded that the reason provided (compulsory scrutiny due to transaction value) did not meet this requirement, rendering the reopening invalid.

5. Application of Safe Harbour Rules:
The Tribunal addressed the application of safe harbour rules, which allow a variation of up to 5% from the arithmetical mean of determined prices. Given that the TPO's external comparable was rejected, only one price (the internal TNMM result) remained. Therefore, the safe harbour provision could not apply. The Tribunal recalculated the necessary upward adjustment to Rs. 10,50,986.23 based on the internal TNMM analysis.

Conclusion:
The Tribunal allowed the assessee's appeal in part, holding that the reopening of the assessment was invalid and that the internal TNMM analysis was appropriate. The upward adjustment to the ALP was recalculated to Rs. 10,50,986.23.