2018 (7) TMI 1848 - HC - Income Tax

High Court Upholds Tribunal Decision on Transfer Pricing Appeals, Emphasizes Need for Perversity Proof

The Commissioner of Income-tax & Anr. Versus M/s. Toyota Kirloskar Motors (P) Ltd.

The High Court dismissed the Revenue's appeals challenging the Tribunal's decision on Transfer Pricing issues. The Court emphasized the need for ... Transfer Pricing - Arm’s Length Price - TNM Method - computation of ALP at the entity/enterprise level - Held that:- in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable - Appeal dismissed. Issues:- Appeal under section 260A of the Income Tax Act, 1961- Arm's Length Price determination by Transfer Pricing Officer- TNM Method for Transfer Pricing- Computation of ALP at entity/enterprise level- Appeal preferred by assesseeArm's Length Price Determination:The appellants-Revenue filed an appeal under section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal. The Tribunal discussed the definition of 'international transaction' under section 92B of the Act, emphasizing the need to consider transactions between associated enterprises (AEs) for computing income having regard to Arm's Length Price (ALP). The Tribunal highlighted the rules for determining ALP under section 92-C and the importance of closely linked transactions. It noted that the Act and Rules support aggregating international transactions that are interlinked or interrelated, rather than evaluating them separately. The Tribunal referred to OECD guidelines and ATO Taxation Rule, endorsing a combined transaction approach for closely linked transactions. It emphasized the need to evaluate transactions together using the most appropriate method.TNM Method for Transfer Pricing:The Tribunal analyzed the Transfer Pricing Officer's (TPO) use of the TNM Method for determining the Transfer Pricing (TP) issue. It discussed the TPO's application of the method based on available records and section 92C parameters. The Tribunal raised concerns about the TPO's approach of computing ALP at the entity/enterprise level for trading and manufacturing segments, which they found unsuitable for the case. It highlighted the need to assess if transactions were interlinked or interconnected for combined evaluation, rather than individually determining ALP for each transaction.Computation of ALP at Entity/Enterprise Level:The Tribunal examined the TPO's computation of ALP at the entity/enterprise level, specifically focusing on the trading and manufacturing segments. It noted that the TPO's bifurcation of segmental operating results did not consider the interrelation between the trading and manufacturing segments. The Tribunal referred to a previous decision involving the same assessee, where it was established that the trading and manufacturing segments were interrelated, warranting a combined transaction approach. Consequently, the Tribunal combined the results of the segments, leading to the deletion of certain adjustments made by the TPO.Appeal Preferred by Assessee:The Tribunal reviewed the appeal preferred by the assessee, highlighting discrepancies in the TPO and Dispute Resolution Panel's (DRP) approach. It noted that the DRP endorsed the TPO's findings without adequately considering the submissions made by the assessee. The Tribunal emphasized the importance of evaluating closely linked transactions together and applying the most appropriate method for determining ALP. It ultimately ruled in favor of the assessee, deleting certain adjustments and allowing the appeal.Conclusion:In a separate judgment, the High Court emphasized the need for establishing an ex-facie perversity in the Tribunal's findings to maintain an appeal under section 260A of the Act. It clarified that questions related to comparables selection and application of filters do not generally give rise to substantial questions of law. The Court dismissed the Revenue's appeals, stating that dissatisfaction with factual findings alone is insufficient to invoke section 260A. The Court underscored the consistent application of parameters for both Revenue and Assessees' appeals. Consequently, the Court dismissed the Revenue's appeals, finding them devoid of merit and not meeting the requirements of section 260A.