2014 (3) TMI 533 - AT - Income Tax

Appellate Tribunal overturns transfer pricing adjustment, emphasizes comparability analysis

Magneti Marelli Powertrain India Pvt. Ltd. Versus Deputy Commissioner of Income Tax

The Appellate Tribunal ITAT DELHI set aside the Assessing Officer's addition on account of transfer pricing adjustment regarding a technical assistance ... Addition on account of transfer pricing adjustment – Clubbing of transactions - Held that:- The assessee clubbed transactions of import of raw material, sub-assembles and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets under one segment of 'Manufacturing of the automotive components' and analyzed all such transactions on a combined basis - This type of combined benchmarking of all the international transactions is not in accordance with law - The mere fact that the overall profit earned by the assessee is more, would not ipso facto lead to the interference then all the international transactions are at ALP – the decision in LG Electronics India Pvt. Ltd. Vs ACIT [2013 (6) TMI 217 - ITAT DELHI] followed – thus, the approach adopted by the assessee in combining so many international transaction for determining ALP on a consolidated basis, is incorrect. Determination of ALP – Projected operating profit margin considered - Held that:- The requirement under the relevant provisions of the Act along with the rules is to consider the `actual' figures and not any `projected' figures - It is beyond the comprehension as to how the projected figures can be substituted for the actuals when the requirement is to benchmark actual international transactions at ALP – thus, the methodology adopted by the assessee cannot be accepted. Percentage of operating margin – Held that:- Rule 10B(4) provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into - Proviso of this rule for use of multiple year data is only an exception and not a rule, which can be invoked if the data for the current year does not result into the determination of correct prices - Nothing of the sort has been shown as to why the data of the comparables for the current year was not appropriate – thus, the view of making comparability by the assessee cannot be accepted. Determination of ALP – Held that:- Neither the assessee followed correct methodology for determination of ALP of this international transaction, nor the TPO/DRP applied the CUP method for determination of ALP in correct perspective – thus, the order passed by the AO making addition proposed by the TPO, cannot be upheld – thus, the order is set aside and the matter remitted back to the AO for freesh determination of ALP – Decided in favour of Assessee. Issues:1. Addition on account of transfer pricing adjustment.Analysis:The appeal before the Appellate Tribunal ITAT DELHI involved a major issue regarding the addition on account of transfer pricing adjustment made by the Assessing Officer. The assessee, a Joint Venture Company, reported an international transaction of `Payment of technical assistance fee' amounting to Rs. 38,58,80,000, which was in dispute. The assessee used the Transactional Net Margin Method (TNMM) to benchmark its international transactions, including the technical assistance fee. However, the Transfer Pricing Officer (TPO) rejected this approach and insisted on applying the Comparable Uncontrolled Price (CUP) method. The TPO determined the Arm's Length Price (ALP) of the transaction at Rs. Nil, leading to the addition in the final order passed by the Assessing Officer.The Tribunal noted discrepancies in the TPO's approach and the methodology adopted by the assessee. The TPO's rejection of TNMM in favor of CUP method without proper comparability analysis was deemed incorrect. The Tribunal emphasized the need for a detailed comparison under the CUP method to determine if the price paid in the international transaction was at ALP. Since the TPO failed to conduct such a comparison and the assessee's methodology was flawed, the Tribunal set aside the order and directed a fresh determination of the ALP of the international transaction by the Assessing Officer/TPO.The Tribunal highlighted that the assessee's combined benchmarking of various international transactions under one segment was not in accordance with the law. Additionally, the use of projected operating profit margin instead of actual figures was deemed incorrect. The Tribunal also criticized the assessee's reliance on mean operating margins of comparables based on past three years' data, as it did not comply with the relevant provisions. The Tribunal emphasized the importance of using data from the financial year in which the international transaction occurred for comparability analysis.In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fresh determination of the ALP of the disputed international transaction. The Tribunal directed the TPO to reevaluate the methodology and comparables for a correct assessment, ensuring a fair opportunity for the assessee to present relevant data. The Tribunal deemed the other grounds regarding interest and penalty proceedings as either consequential or irrelevant to the main issue at hand.