2014 (4) TMI 200 - AT - Income Tax

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

Twilight Jewellery (P.) Ltd. Versus Dy. Commissioner of Income Tax

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 ... Addition on account of transfer pricing adjustment by A.O. – Most appropriate method which has to be adopted for determining ALP - Held that:- Assessee is only a job worker or a contract manufacturer who is entitled for making charges based on its cost incurred and not based on value of material supplied by its AE - Comparables chosen by TPO, who are full fledged independent manufacturers cannot be prima facie considered for purpose of comparability analysis, as in all cases of comparables there is a value addition and a mark up on cost at time of sale - If any of direct methods like CUP, RPM or CPM can be adopted for bench marking transactions, then they should be given preference - Once these traditional methods are rendered inapplicable then only TNMM should be resorted to as a last measure - Entire matter is remanded back to file of the AO/TPO to examine whether CUP can be considered as the most appropriate method or not - Entire assessment is set aside for fresh adjudication in the light of observation made in this order – Decided in favour of assessee. 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.