2016 (11) TMI 1660 - AT - Income Tax

Tribunal decision: Upward adjustment upheld, downward adjustment dismissed.

The Tribunal partly allowed the appeal, remitting the upward adjustment issue back for recalculation, while dismissing the downward adjustment on ... TP Adjustment - upward adjustment made on the value of its international transactions with its Associate Enterprises (‘’AEs’’) - MAM selection - Lower authorities selecting CUP method over TNM method - geographical difference between supplies made to Associated Enterprise and Non Associated Enterprise - HELD THAT:- When uncontrolled comparables are available internally on some of the items which was sold to Associated Enterprise then such comparables would form a separate class of its own. TPO had considered forty nine thread types for which there were internal uncontrolled transactions available for comparison. TPO had not made an adjustment for any of the other varieties of thread sales made by the assessee to its Associated Enterprise. We do find that atleast for eight items among these forty nine thread types, mentioned at Sl. No.27,28,30,35,37,38,39 & 44, there was negative differences adjustment which were ignored by the TPO, in the work out at annexure A of its order. When a class of items are considered for adjustment, the negative effect of some of the items therein cannot be ignored. As for contention of the assessee is that there were geographical difference between supplies made to Associated Enterprise and Non Associated Enterprise, there is a clear finding by the ld. DRP that assessee was catering to Asian countries and Associated Enterprise were located in Sri Lanka, Mauritius, Pakistan and Egypt and Non Associated Enterprises were located in Srilanka, Bangladesh, Malawi etc with not much of a geographical difference. Viz-a-viz volume discount mentioned by the ld. Authorised Representative, ld. DRP had given a clear finding that there were substantial sales in alteast in five items falling in the table appearing in para 2.10 of its order. Considering all these, we are the opinion that lower authorities were justified in selecting CUP method over TNM method. However, as mentioned by us, computation of the Arms Length Price adjustment required on forty nine number of items mentioned in the order of TPO requires to be reworked, so that negative amounts are also considered for aggregation and for working out the Arms Length Price adjustment that is required. For this limited purpose of recalculation, we remit the issue back to the file of the Assessing Officer/TPO. Downward adjustment on commission paid to its Associated Enterprises - payment was for agency commission or management commission fees - HELD THAT:- As already noted by us the orders on which commission was paid was only on items sold to group concerns and not to any third parties. There is much strength in the argument of the ld. Departmental Representative that in such a situation onus of the assessee was much more than in a scenario where orders on which commission was received were on supplies to third parties. Assessee had failed to discharge this. Consolidation of fragmented orders could have been done by the assessee itself and did not require services of an Associated Enterprise or knowledge of any sublims stalls. When assessee was unable to bring on record anything to show for what reason agency commission was paid, in our opinion there arose an exceptional circumstance where by Arms Length Price could be taken as Nil. As for decision of the Delhi Bench of the Tribunal in the case M/s. McCann Erickson India (P) Ltd [2012 (7) TMI 728 - ITAT, DELHI] strongly relied by the ld. Authorised Representative, assessee therein was able to demonstrate the type of services, description of service and benefits received by the it from its Associated Enterprise. Further, the payment was not agency commission but management commission fees. In the host of other judicial decisions relied by the ld. Authorised Representative also the question dealt was on the management fees and not on agency commission. In these circumstances, we do not find any reason to interfere with the orders of the lower authorities Issues Involved:1. Upward adjustment on the value of international transactions with Associate Enterprises (AEs).2. Downward adjustment on commission paid to Associate Enterprises.Issue-wise Detailed Analysis:1. Upward adjustment on the value of international transactions with Associate Enterprises (AEs):The assessee, engaged in manufacturing and selling sewing threads, yarns, and industrial fabrics, filed its return of income declaring B32,84,78,420/-. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) due to international transactions exceeding B15 Crores. The TPO identified discrepancies in the prices billed to AEs compared to Non-AEs, preferring the Comparable Uncontrolled Pricing Method (CUP) over the Transactional Net Margin Method (TNMM) used by the assessee. The TPO recommended an upward adjustment of B1,52,16,747/-. The Dispute Resolution Panel (DRP) upheld the TPO's preference for the CUP method and confirmed the adjustment after considering the Tribunal's directions in previous years. The Tribunal found the CUP method appropriate but required recalculating the Arms Length Price adjustment to include negative differences. The issue was remitted back to the Assessing Officer/TPO for recalculation.2. Downward adjustment on commission paid to Associate Enterprises:The assessee paid B7,84,20,835/- as commission to its AE for export services. The TPO questioned the justification for this payment, as no substantial evidence of services rendered by the AE was provided. The TPO recommended an adjustment, considering the Arms Length Price of the services as 'Zero'. The DRP upheld the TPO's decision, noting that the AE was not a sales agent but a centralized entity distributing orders within the group. The Tribunal agreed with the lower authorities, emphasizing the lack of evidence for services rendered by the AE. The Tribunal dismissed the assessee's contention, affirming the adjustment.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, remitting the issue of upward adjustment back to the Assessing Officer/TPO for recalculation, while dismissing the ground related to the downward adjustment on commission paid to AEs.