2020 (10) TMI 1240 - AT - Income Tax

Tribunal Emphasizes Transfer Pricing Methods & Procedural Compliance

Dow Chemical International Pvt. Ltd. Versus Dy. Commissioner of Income Tax

The Tribunal directed for a re-examination and fresh adjudication of issues related to the arm's length price of export transactions and intra-group ... TP Adjustment - arm's length price of finished goods exported to the AE - MAM selection - export of finished goods to the AEs, the Transfer Pricing Officer noticed that the assessee had benchmarked such transaction by using Transactional Net Margin Method (TNMM) on aggregate basis - TPO did not accept the contention of the assessee and proceeded to benchmark the transaction by applying CUP method - Assessee submitted by the assessee that CUP cannot be treated as the most appropriate method considering the different economic and geographical condition between the AES and the non-AEs - whether the domestic sales can be applied as CUP for determining the arm's length price of export sales? - HELD THAT:- It is fairly well settled, CUP method requires strict comparability. It cannot be denied that the pricing of a product varies on the basis of geographical location. Thus, primarily, the price of products sold in domestic market cannot be compared with the price of the product sold in foreign country due to various factors. Therefore, if the Transfer Pricing Officer selects CUP as the most appropriate method to benchmark the transaction, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied. As further noticed, during the year under consideration assessee had sold 34 different products to both overseas AES as welt as domestic unrelated parties. Out of the 34 products sold, Transfer Pricing Officer has accepted the price of 16 products sold to AES to be at arm's length, since, the price charged to AES is more than the price charged to non-AEs. In case of 18 products only She Transfer Pricing Officer has made adjustment as the price charged to AES is less than the price charged to non-AEs. Thus, it appears, the Transfer Pricing Officer has adopted a very selective approach while applying CUP. Transfer Pricing Officer has only allowed volume adjustment on purely ad-hoc basis, that too, only in respect of a single product while ignoring various other products wherein volume difference between AE and non-AE transaction is substantial. Similarly, assessee's contention that the price of products insofar as sales made to the AE and non-AE would vary due to timing difference has not been properly considered. The various adjustments which are required to be made have been demonstrated before us by the learned counsel for the assessee by furnishing charts. In our view, all these factors have to be taken into consideration, even, while applying CUP method. One more submission of the assessee is that the DRP has allowed adjustment on account of marketing/allied cost. However, while computing such adjustment, the Assessing Officer has not taken note of marketing personnel cost. We find substantial merit in the aforesaid submission of the learned Counsel that matter needs to be restored to the Assessing Officer for examining afresh -These grounds are allowed for statistical purposes. Adjustment made on account of payment made towards intra-group service - assessee has paid an amount towards marketing, administrative and logistic service and for availing information technology service - HELD THAT:- The Transfer Pricing Officer has simply proceeded to benchmark the transaction on a purely ad-hoc/estimate basis without following any one of the methods prescribed under section 92C of the Act. It is patent and obvious from the order passed by the Transfer Pricing Officer that he has not determined the arm's length price by applying either CUP or any other approved method. Had the benchmarking been done under CUP method, the Transfer Pricing Officer should have brought on record at least a few comparable uncontrolled transactions to demonstrate that the payment made by the assessee towards intra- group services is not at arm's length. Whereas, the Transfer Pricing Officer has not brought on record even a single comparable uncontrolled transaction to demonstrate that the price charged by the assessee is not at arm's length. on the contrary, it is tell-tale from the order of the Transfer Pricing Officer that he has proceeded to benchmark the transaction purely on estimate basis by applying man- hour salary rate of a single employee in case of marketing, administrative and logistic services. Similar is Vie situation in case of IT services, wherein, the Transfer Pricing Officer has estimated the arm's length price at 30% of the amount paid. The aforesaid method of estimating the arm's length price is not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Transfer Pricing Officer has simply estimated the arm's length price of the transaction on estimate basis without applying any one of the approved methods. This cannot be accepted. There is umpteenth number of judicial precedents, wherein, it has been held that determination of arm's length price has to be done by applying any one of the methods prescribed under section 92C r/w rule 10B. Thus adjustment made by the Transfer Pricing Officer to the arm's length price of payment made towards Intra-group services is unsustainable. In view of the aforesaid, we have no hesitation in deleting the addition made by the Assessing Officer on account of the aforesaid adjustment. Grounds are allowed. Levy of interest under section 234A - As per assessee since the return of income was filed within the time prescribed under section 139(1) of the Act there is no question of levy of interest under the aforesaid provision - HELD THAT:- We direct the Assessing Officer to verify the facts and if it is found that the return of income for the impugned assessment year was filed within the time allowed under section 139(1) of the Act, no interest under section 234A of the Act can be le vied. This ground is allowed for statistical purposes. Issues Involved:1. Adjustment to the arm's length price of finished goods exported to the AE.2. Adjustment made on account of payment towards intra-group services.3. Levy of interest under section 234A of the Income Tax Act.4. Levy of interest under section 234B of the Income Tax Act.5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Adjustment to the Arm's Length Price of Finished Goods Exported to the AE:The Transfer Pricing Officer (TPO) rejected the assessee's benchmarking under the Transactional Net Margin Method (TNMM) and applied the Comparable Uncontrolled Price (CUP) method to determine the arm's length price of export transactions. The TPO used domestic third-party sales as CUP, allowing a 15% volume discount for one product and a 2.35% adjustment for marketing costs. The assessee argued that TNMM should be the most appropriate method due to geographical, volume, and timing differences between AE and non-AE transactions. The Tribunal observed that the TPO's selective approach in applying CUP and inadequate consideration of necessary adjustments rendered the method inappropriate. Consequently, the issue was restored to the Assessing Officer for fresh adjudication, emphasizing the need for proper adjustments and comparability.2. Adjustment Made on Account of Payment Towards Intra-Group Services:The assessee paid significant amounts for marketing, administrative, logistic, and information technology services, benchmarking these on a cost allocation basis. The TPO, relying on the previous year's approach, rejected this and estimated the arm's length price using an ad-hoc method. The Tribunal noted that the TPO did not follow any prescribed method under section 92C(3) of the Act. It emphasized that the TPO must apply one of the approved methods for determining the arm's length price and cannot rely on estimates. The Tribunal found the adjustment unsustainable and deleted the addition made by the Assessing Officer.3. Levy of Interest Under Section 234A of the Income Tax Act:The assessee contended that since the return of income was filed within the time prescribed under section 139(1) of the Act, no interest under section 234A should be levied. The Tribunal directed the Assessing Officer to verify the filing date and, if found within the prescribed time, to not levy interest under section 234A.4. Levy of Interest Under Section 234B of the Income Tax Act:This issue was deemed consequential and did not require separate adjudication by the Tribunal.5. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act:The Tribunal dismissed this ground as premature, indicating that it was not ripe for consideration at this stage.Conclusion:The Tribunal provided detailed directions for re-examination and fresh adjudication of the issues concerning the arm's length price of export transactions and intra-group services, emphasizing adherence to prescribed methods and proper adjustments. It also addressed the procedural aspects related to the levy of interest and penalty proceedings, ensuring compliance with statutory provisions.