2020 (11) TMI 1098 - AT - Income Tax

Tribunal rules in favor of assessee on arm's length price adjustment

Roki Minda Co. Pvt. Ltd, Versus. ACIT, Circle-21 (1), New Delhi

The Tribunal held in favor of the assessee, ruling that the adjustment for the arm's length price (ALP) of the international transaction of purchasing ... TP Adjustment - international transaction of purchase of fixed assets - charge of markup by AE to assessee at rate of 8% on certain fixed assets purchased by the assessee - Whether the transaction of purchase of fixed assets is covered as an international transaction or not ? - HELD THAT:- As relying on case of Honda motorcycle and Scooter India private limited. [2015 (4) TMI 502 - ITAT DELHI] here cannot be adjustment in the hands of the assessee with respect to the arm’s-length price of the international transaction of purchase of fixed assets per se. In the present case the arm’s-length price adjustment is only on account of purchase of fixed assets. Admittedly the assessee has not claimed any depreciation during the year. However whenever assessee claims depreciation on that the adjustment with respect to the above transaction would impact the actual cost of the asset. Therefore, in absence of any claim of depreciation by the assessee we direct the learned transfer pricing officer/assessing officer to delete the above adjustment to the total income of the assessee. Appeal of the assessee is allowed. Issues Involved:1. Adjustment of Rs. 1,547,516/- for the mark-up charged by the AEs on the purchase of assets.2. Non-consideration of relief of Rs. 65,613/- granted by TPO.3. Rejection of benchmarking analysis using the Resale Price Method (RPM).4. Consideration of Comparable Uncontrolled Price (CUP) as the Most Appropriate Method.5. Determination of ALP mark-up at NIL.6. Non-appreciation of mark-up charged by AEs commensurate with services performed.7. Non-granting of effect of credit facilities extended by AE.8. Non-consideration of administrative cost working charged by AE.9. Non-provision of benefit of the second proviso of section 92C (2).10. Penalty proceedings initiated under Section 271(1)(c).Detailed Analysis:1. Adjustment of Rs. 1,547,516/- for the mark-up charged by the AEs on the purchase of assets:The assessee, Rocki Minda company private limited, contested an adjustment of Rs. 1,547,516/- made by the AO/TPO on the mark-up charged by its AEs for the purchase of assets amounting to Rs. 2,23,88,782/-. The assessee used the Resale Price Method (RPM) for benchmarking and claimed that the mark-up included 5% for administration costs and 3% as profit. However, the AO/TPO found no supporting documents for the mark-up and determined the ALP of the transaction as NIL.2. Non-consideration of relief of Rs. 65,613/- granted by TPO:The assessee argued that the AO did not consider the relief of Rs. 65,613/- granted by the TPO in the appeal effect dated 16.11.2016 pursuant to DRP's directions. The AO was directed to verify the calculation concerning the excess adjustment.3. Rejection of benchmarking analysis using the Resale Price Method (RPM):The AO/TPO rejected the RPM used by the assessee, stating that the comparables selected were functionally different from the AE. The DRP upheld this view, noting that the AE acted more as a facilitator than a distributor, and the contractual terms and risks undertaken by the comparables were not available. The DRP concluded that the RPM was not appropriate for the transaction.4. Consideration of Comparable Uncontrolled Price (CUP) as the Most Appropriate Method:The AO/TPO considered the CUP method as the Most Appropriate Method for benchmarking the transaction. The assessee contended that the CUP method was inappropriate as internal and external comparable data were unavailable. The DRP upheld the use of the CUP method, stating that the AE did not provide any substantial services to justify the mark-up.5. Determination of ALP mark-up at NIL:The AO/TPO determined the ALP mark-up at NIL, arguing that the AE did not provide any significant services or have expertise in trading the items purchased by the assessee. The DRP upheld this determination, noting that the AE's expertise and the services rendered were not established.6. Non-appreciation of mark-up charged by AEs commensurate with services performed:The assessee argued that the mark-up charged by the AEs was commensurate with the services performed, such as procurement and testing. However, the DRP found no evidence of such services and upheld the AO/TPO's determination of NIL mark-up.7. Non-granting of effect of credit facilities extended by AE:The assessee contended that the AO/TPO did not consider the credit facilities extended by the AE in respect of the procurement of assets. This issue was not specifically addressed in the judgment.8. Non-consideration of administrative cost working charged by AE:The assessee argued that the AO/TPO did not consider the administrative cost working of 5% charged by the AE. The DRP upheld the AO/TPO's view, as the services rendered by the AE were not substantiated.9. Non-provision of benefit of the second proviso of section 92C (2):The assessee claimed that the AO/TPO did not provide the benefit of the second proviso of section 92C (2). This issue was not specifically addressed in the judgment.10. Penalty proceedings initiated under Section 271(1)(c):The assessee argued that the penalty proceedings initiated under Section 271(1)(c) were based on untenable grounds, as there was no concealment of income or submission of inaccurate particulars. This issue was not specifically addressed in the judgment.Conclusion:The Tribunal held that the adjustment for the ALP of the international transaction of purchase of fixed assets could not be made in the hands of the assessee. The Tribunal referenced the decision in Honda Motorcycle And Scooter India Private Limited, stating that no adjustment can be made for the difference between the declared value and the ALP of such international transactions. The Tribunal directed the AO/TPO to delete the adjustment to the total income of the assessee, as no depreciation was claimed during the year. The appeal was allowed, keeping all other issues open.