Tribunal upholds transfer pricing rejection for foreign enterprises, directs depreciation evidence, affirms international transaction limits.

The Tribunal upheld the rejection of Foreign/Associated Enterprises (AEs) as the tested party for transfer pricing analysis, emphasizing the comparison of profit margins with Indian enterprises. It directed reconsideration of depreciation adjustments, requiring evidence of differing rates. The restriction of transfer pricing adjustments solely to international transactions was affirmed, and the deletion of a transfer pricing addition using the Resale Price Method (RPM) was approved, with directions for reassessment. Both appeals were partly allowed for statistical purposes, ensuring adherence to legal standards.

---

---

Issues Involved:
1. Rejection of Foreign/Associated Enterprises (AEs) as tested party.
2. Denial of adjustment on account of excess depreciation claimed by the assessee.
3. Restriction of transfer pricing adjustment only to international transactions.
4. Deletion of transfer pricing addition by applying the Resale Price Method (RPM) for benchmarking the international transaction of "Import of trading goods."

Detailed Analysis:

1. Rejection of Foreign/Associated Enterprises (AEs) as Tested Party:
The assessee was incorporated in India and is a wholly owned subsidiary of a Belgian company, engaged in the manufacture of Steel Tyre Cord and Hose Reinforcement wire. The assessee applied the Cost Plus method for determining the arm’s length price (ALP) of the “Import of raw material” transaction, selecting seven foreign/AEs as the tested party. The Transfer Pricing Officer (TPO) rejected this, citing the assessee's failure to furnish necessary documents and reliable supporting evidence for the Functions, Assets, and Risks (FAR) analysis. The TPO adopted the Transactional Net Margin Method (TNMM) instead, leading to a transfer pricing adjustment of Rs. 15,35,50,429/-. The Dispute Resolution Panel (DRP) upheld this, and the assessee appealed to the Tribunal.

The Tribunal noted that the assessee did not challenge the adoption of TNMM or the comparables but only the rejection of foreign/AEs as the tested party. It emphasized that under Indian law, the profit margin of the Indian enterprise should be compared with that of the comparables to determine the ALP. The Tribunal held that considering the foreign/AE as the tested party would contradict the transfer pricing provisions' intent, which aims to prevent profit shifting from the Indian taxation base. The Tribunal cited precedents where foreign/AEs were not accepted as tested parties and upheld the authorities' decision to reject the foreign/AEs as tested parties.

2. Denial of Adjustment on Account of Excess Depreciation Claimed by the Assessee:
The assessee claimed higher depreciation compared to its comparables and sought an adjustment in the Profit Level Indicator (PLI). The TPO rejected this, stating that there was no evidence of different depreciation rates and the assessee did not provide a reasonable calculation for the adjustment. The DRP also refused the adjustment due to the lack of necessary information.

The Tribunal acknowledged that differences in depreciation rates could materially affect net profit margins and should be adjusted. However, it noted that the assessee failed to provide evidence of different depreciation rates. The Tribunal remanded the matter to the AO/TPO to allow adjustments if there is a difference in depreciation rates, directing that the depreciation of comparable companies be recomputed under the straight-line method at the rates used by the assessee.

3. Restriction of Transfer Pricing Adjustment Only to International Transactions:
The TPO computed the transfer pricing adjustment at the entity level, including both associated and non-associated enterprises. The assessee contested this before the DRP, which restricted the adjustment to international transactions. The Revenue appealed this decision.

The Tribunal upheld the DRP's decision, stating that transfer pricing provisions apply only to transactions between associated enterprises, as defined in sections 92 and 92B of the Act. The Tribunal cited jurisdictional High Court rulings supporting this view and dismissed the Revenue's appeal.

4. Deletion of Transfer Pricing Addition by Applying the Resale Price Method (RPM) for Benchmarking the International Transaction of "Import of Trading Goods":
The assessee reported an international transaction of “Import of trading steel cord” and applied the RPM to demonstrate the ALP. The TPO rejected RPM and used TNMM, resulting in a transfer pricing adjustment of Rs. 76,68,310/-. The DRP approved the application of RPM and deleted the addition.

The Tribunal agreed with the DRP, stating that RPM is the most appropriate method for transactions involving the resale of goods without further processing. The Tribunal cited the jurisdictional High Court's judgment in CIT Vs. L’oreal India Pvt. Ltd., supporting the use of RPM. However, it noted that a similar issue in a preceding year was remanded to the TPO for determining the ALP using RPM. Following this precedent, the Tribunal remanded the matter to the AO/TPO to compute the ALP using RPM, allowing the assessee a reasonable opportunity of hearing.

Conclusion:
Both appeals were partly allowed for statistical purposes, with the Tribunal providing detailed directions on each issue to ensure compliance with legal standards and fair assessment. The order was pronounced in the Open Court on 24th April, 2019.

---