ITAT Upholds Assessee's Transfer Pricing Method, Rejects Revenue's Adjustments Under Rule 10B(1)(e)

The ITAT Mumbai upheld the assessee's transfer pricing methodology, rejecting the Revenue's adjustments that included non-AE transactions in AE margins, which violated Rule 10B(1)(e). The tribunal accepted the TPO's 25% related party transaction filter for comparables and denied the grant of a standard ±5% deduction as per the Finance Act, 2012, ruling that the AO's refusal to allow it was lawful. Regarding royalty payments under a collaboration agreement, the tribunal held that payments approved or deemed approved by RBI must be accepted at arm's length price, rejecting the TPO's full disallowance. The decision favored the assessee on both transfer pricing adjustments and royalty disallowance.

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Issues Involved:

1. Adjustment of Rs. 5,10,61,123 in respect of international transactions.
2. Denial of plus-minus 5% benefit under the proviso to section 92C(2) of the Act.
3. Adjustment of Rs. 4,29,03,966 pertaining to payment of royalty.
4. Non-credit of Rs. 23,30,040 for demand adjusted against refund for the assessment year 2007-2008.
5. Charging of interest under section 234B.

Detailed Analysis:

1. Adjustment of Rs. 5,10,61,123 in respect of international transactions:

The assessee, engaged in turnkey services for various plants, reported international transactions with Associated Enterprises (AEs) amounting to Rs. 23.48 crore for imports and Rs. 82.23 crore for exports. The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Net Operating Margin to Sales (OP/Sales), reporting a margin of 4.63%. The Transfer Pricing Officer (TPO) proposed adjustments, which were reduced by the Dispute Resolution Panel (DRP) to Rs. 5.10 crore. The assessee's objections included the use of internal TNMM and the inclusion/exclusion of certain comparable cases.

Internal TNMM:

The assessee argued that its internal transactions with AEs showed a higher profit margin (6.54%) compared to Non-AEs (4.20%). However, the TPO rejected this due to discrepancies in the segmental data and the inclusion of Non-AE transactions in AE segments. The Tribunal upheld the TPO's view, noting that the figures provided by the assessee were not reliable and did not comply with the definition of 'international transactions' as per the Act.

External TNMM:

The TPO included six comparable cases, with the average PLI of 12.72%. The Tribunal addressed the inclusion/exclusion of specific comparables:

- Tata Projects Limited: The Tribunal upheld the TPO's revised calculation of OP/TC at 4.13%.
- Walchandnagar Industries Limited: The Tribunal upheld the revised OP/TC ratio of 9.63%.
- Mcnally Bharat Limited: The Tribunal upheld the revised OP/TC ratio of 8.67%.
- TRF Limited: The Tribunal directed the use of segment-level results instead of entity-level.
- Gillanders Arbuthnot & Company Ltd.: The Tribunal directed the inclusion of the Engineering Division's segmental results.
- Engineers India Limited: The Tribunal excluded this company due to its status as a Government Undertaking and high related party transactions.
- Sriram EPC Limited: The Tribunal upheld its inclusion as comparable.

The Tribunal directed the AO/TPO to re-compute the ALP based on the revised list of comparables.

2. Denial of plus-minus 5% benefit under the proviso to section 92C(2) of the Act:

The DRP had directed to allow the plus-minus 5% benefit, but the AO did not grant it. The Tribunal upheld the AO's decision, citing the retrospective amendment by the Finance Act, 2012, which clarified that the benefit is not a standard deduction but applicable only if the variation is within 5%.

3. Adjustment of Rs. 4,29,03,966 pertaining to payment of royalty:

The assessee paid royalty and technical fees to its AE, which were approved by the RBI. The TPO determined the ALP at Rs. Nil. The Tribunal found that the payments, being approved by the RBI, should be considered at ALP and directed to delete the adjustment of Rs. 4.29 crore.

4. Non-credit of Rs. 23,30,040 for demand adjusted against refund for the assessment year 2007-2008:

The Tribunal directed the AO to verify the factual aspect and pass an appropriate order after allowing a reasonable opportunity of being heard to the assessee.

5. Charging of interest under section 234B:

This issue was deemed consequential and disposed of accordingly.

Conclusion:

The appeal was partly allowed, with directions to re-compute the ALP based on the revised list of comparables, delete the adjustment for royalty payment, verify the non-credit of demand adjusted against refund, and dispose of the interest issue as consequential.

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