2017 (2) TMI 1446 - AT - Income Tax

Tribunal dismisses Revenue's appeal, directs AO/TPO to verify figures.

Development Consultants Ltd. Versus Dy. Commissioner of Income Tax, Cir-11, Kolkata And Vice-Versa.

The Tribunal dismissed the Revenue's appeal, allowed the assessee's cross-objections for statistical purposes, and directed the AO/TPO to verify the ... TP Adjustment - transfer price determined by the TPO as per Cost Plus Method and in its place applying the Resale Price Method - HELD THAT:- There is merit in the submissions of the assessee that method adopted by the ld. CIT(A) to compute ALP neither falls in CPM Method nor in RPM Method. The Hon'ble Income Tax Appellate Tribunal-Kolkata, in the appeal No. [2008 (4) TMI 340 - ITAT CALCUTTA-A] in the case of the assessee for assessment years 2003-04 & 200405, had concluded that in relation to the engineering drawing and design services rendered by the assessee to its associated enterprise DClL, the DClL should retain the gross margins as determined through the benchmarking exercise. In any event the ld CIT(A) can not apply his own method except the method given in Rule 10B (1) (b) of the I.T. Rules. However, for difference in accounting period the TPO/AO may examine the figures for the period January 2005 to March 2005. As per the additional evidence produced by the ld AR for the assessee, before us, (financials of DCIL from January 2005 to March 2005), since these figures of financials of DCIL from January 2005 to March 2005 were not available before the TPO/AO. Therefore, for difference in accounting period, the TPO/AO may examine the figures for the period January 2005 to March 2005 of DCIL. Therefore, we direct the TPO/AO to examine the figures of the financials of DCIL for the period January 2005 to March 2005 and compute the ALP as per the method suggested by the Hon`ble ITAT in assessee`s own case and submitted by the assessee before us. We direct TPO/AO only to examine the figures of the financials of DCIL from January 2005 to March 2005, and if he finds the figures of the financials of DCIL true and correct, he should accept the computation of the assessee as furnished by the assessee before us, which is reproduced by us above. Therefore, based on the factual position, we direct the AO/TPO to accept the computation as given before us, (after verification of figures of January 2005 to March 2005), which is based on the method accepted by the Hon`ble ITAT, Kolkata in assessee`s own case. Issues Involved:1. Determination of the appropriate method for calculating the Arm's Length Price (ALP) for international transactions: Cost Plus Method (CPM) vs. Resale Price Method (RPM).Issue-Wise Detailed Analysis:1. Determination of the Appropriate Method for Calculating the Arm's Length Price (ALP):Background and Facts:The case involves the assessment of M/s Development Consultants Private Limited (DCPL) for the assessment year 2005-2006. DCPL, a closely held private limited company, engaged in various international transactions with its associated enterprises (AEs) including Development Consultant International Limited (DCIL), The Kuljian Corporation (TKC), and Data-Core Systems Inc. USA (DataCore US). The transactions were primarily for engineering drawing and design services, deputation of employees, and reimbursements.Transfer Pricing Report and Methods:DCPL's Transfer Pricing (TP) study report, prepared by PWC, recommended the Cost Plus Method (CPM) and the Transactional Net Margin Method (TNMM) as the most appropriate methods for justifying the arm's length nature of its international transactions. The internal CPM was used to compare margins earned from transactions with AEs to those with third parties.Assessing Officer and Transfer Pricing Officer's Approach:The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) under Section 92 of the Income Tax Act. The TPO, following previous years' adjustments, determined the ALP using a markup on costs percentage earned from unrelated parties, resulting in an adjustment of Rs. 275.54 lakhs to the total income of the assessee.Commissioner of Income Tax (Appeals) Approach:The Commissioner of Income Tax (Appeals) [CIT(A)] observed that similar issues were covered in the assessee's own case for assessment years 2003-04 and 2004-05. The CIT(A) directed the AO to compute ALP on a transaction-by-transaction basis and supported the ITAT's judgment in the assessee's case. However, for transactions with DCIL, the CIT(A) deviated from the ITAT's judgment, stating that RPM was appropriate but with modifications due to differences in accounting periods and policies. The CIT(A) computed the ALP using a contemporary resale price method, resulting in an adjustment of Rs. 251.47 lakhs.Arguments by Revenue and Assessee:The Revenue argued that the CPM recommended by the TPO was appropriate as per the TP study report submitted by the assessee. The assessee contended that the AO/TPO did not follow the ITAT's decision in the assessee's own case and instead used the CPM, which was not justifiable. The assessee argued that the CIT(A)'s method for computing ALP neither fell under CPM nor RPM and deviated from the ITAT's accepted method.Tribunal's Analysis and Decision:The Tribunal noted that the CIT(A) had ignored the provisions of Rule 10B(1)(b) of the Income Tax Rules, which define the RPM. The CIT(A)'s method of applying the gross profit percentage on sales as gross profit percentage on cost was incorrect. The Tribunal emphasized that the CIT(A) could not apply a method not recognized under Indian law and directed the AO/TPO to examine the financial figures for the period January 2005 to March 2005 and compute the ALP as per the method accepted by the ITAT in the assessee's own case.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections for statistical purposes. The AO/TPO was directed to verify the figures for January 2005 to March 2005 and accept the computation based on the method suggested by the ITAT in the assessee's own case.Order Pronounced:The order was pronounced in the open court on 15/02/2017.