Assessee as job worker entitled to cost-plus; AO/TPO to reassess transfer pricing; apply direct methods first under Sec 92C

ITAT MUMBAI held in favour of the assessee, directing that the A.O./TPO reassess the transfer pricing adjustment. The tribunal found the assessee to be a job worker/contract manufacturer entitled to cost-plus charges, and that the comparables selected by TPO (full-scale independent manufacturers) were prima facie inappropriate. ITAT ordered that direct methods (CUP, RPM, CPM) be considered first and TNMM used only if those are inapplicable, remanding the matter to the AO/TPO for fresh adjudication.

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Issues Involved:
1. Legality of the assessment order passed under Section 143(3) read with Section 144C(13).
2. Confirmation of transfer pricing adjustment of Rs. 9,07,50,742/- by the Dispute Resolution Panel (DRP).
3. Admission of additional grounds and evidence by the assessee.

Detailed Analysis:

1. Legality of the Assessment Order:
The assessee challenged the assessment order passed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) following the directions of the DRP. The contention was that the order was bad in law. However, the tribunal did not find any specific argument or evidence from the assessee to substantiate this claim. The primary focus of the tribunal was on the transfer pricing adjustment rather than the procedural legality of the assessment order.

2. Transfer Pricing Adjustment:
The core issue was the transfer pricing adjustment of Rs. 9,07,50,742/- on transactions with the Associated Enterprise (AE). The assessee, engaged in manufacturing diamonds and precious stone-studded jewelry, primarily exported to its AE. The Transfer Pricing Officer (TPO) noted that the assessee did not submit a transfer pricing study report during proceedings and failed to justify the markup rates charged to the AE. The TPO adopted the Transactional Net Margin Method (TNMM) and selected nine comparables, ultimately determining a Profit Level Indicator (PLI) margin of 10.95%, significantly higher than the assessee's PLI of (-) 1.25%.

The assessee argued that the Cost Plus Method (CPM) was the most appropriate method, given that the raw materials were supplied by the AE at cost, and the assessee acted mainly as a job worker. The assessee also proposed the Comparable Uncontrolled Price (CUP) method, citing internal comparables with non-AE transactions. However, the tribunal observed inconsistencies in the assessee's approach and noted that the primary document, the transfer pricing study report, was not filed before the TPO.

The tribunal concluded that the TPO was justified in adopting the TNMM due to the lack of a proper comparability analysis by the assessee. However, considering the new arguments and additional evidence presented, the tribunal decided to remand the matter back to the TPO/AO for fresh adjudication. The TPO/AO was directed to examine the applicability of the CUP method and, if it failed, to consider the CPM with appropriate comparables.

3. Admission of Additional Grounds and Evidence:
The assessee raised additional grounds and submitted a transfer pricing study report as additional evidence. The tribunal noted that the assessee initially provided a false certificate claiming the report was filed before the TPO, which was later corrected. Given the circumstances, the tribunal admitted the additional evidence but imposed a cost of Rs. 10,000/- on the assessee for making false representations.

Conclusion:
The tribunal set aside the entire assessment for fresh adjudication, directing the TPO/AO to consider the CUP method and, if necessary, the CPM with relevant comparables. The assessee was instructed to provide all necessary information and material to support its contentions. The tribunal also imposed a cost of Rs. 10,000/- on the assessee for false representation. The appeal was treated as allowed for statistical purposes.

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