2022 (5) TMI 1521 - AT - Income Tax

Tribunal decision on customs duty margins & TP services fees highlights importance of ALP methods

The Tribunal partly allowed the Revenue's appeal, directing adjustments to the margins of the comparables for customs duty but upheld the CIT(A)'s order ... TP Adjustment - CIT(A) allowing the customs duty adjustments to the margin of the respondent-assessee company - in whose hands such adjustments should be made? - HELD THAT:- The Co-ordinate Bench of this Tribunal in the case of ACIT vs. Nord Drive Systems Pvt. Ltd. [2019 (12) TMI 32 - ITAT PUNE] held that the adjustments is required to be made only in the profit margin of the comparables. This decision is being the latest decision on the issue, we do not prefer other decisions referred by the ld. AR. Accordingly, we direct the Assessing Officer/TPO to make adjustments to the margins earned by comparables instead of the margins of the respondent-assessee company. To this extent, the order of the ld. CIT(A) is reversed, hence, ground of appeal no.1 and 2 stands partly allowed. TP adjustments on account of technical services fees by stating that no additional evidence was filed by the respondent-assessee - as contended that there is no necessity of technical services fees as the respondent-assessee had not started manufacturing activities - CIT-A concluded that the respondent-assessee had availed the technical services from its AEs - HELD THAT:- As on the question of necessity of technical services, it is settled position that the Assessing Officer cannot question the necessity of incurring of the expenditure on technical services, as it is within the exclusive domain of the respondent-assessee. Further, in the case of CIT vs. M/s. Merck Ltd. [2016 (8) TMI 561 - BOMBAY HIGH COURT] held that not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services, makes the entire Transfer Pricing Study is unsustainable in law. Thus no illegality in the order of the ld. CIT(A). Appeal filed by the Revenue stands partly allowed. Issues Involved:1. Customs Duty Adjustments2. Technical Services Fees AdjustmentsDetailed Analysis:1. Customs Duty Adjustments:The respondent-assessee, a company engaged in trading and distribution of Completely Knocked Down (CKD) Parts of Motorbikes, reported international transactions with its Associated Enterprises (AEs) and sought to benchmark these transactions using Cost Plus Method (CPM). The Transfer Pricing Officer (TPO) suggested upward TP adjustments, rejecting the Transfer Pricing (TP) study report submitted by the respondent-assessee. The TPO proposed adjustments based on the arithmetic mean of Gross Profit Margin of selected comparables.The respondent-assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who directed adjustments for customs duty incurred, as comparables did not incur such expenses. The CIT(A) relied on the decision of the Pune Tribunal in the case of Skoda Auto India Pvt. Ltd., allowing adjustments to the profit margin of the respondent-assessee.The Revenue contended that economic adjustments for customs duty should not be granted, citing the decision of the Pune Tribunal in the case of Fresenius Kabi India Private Limited. It argued that any differences should be adjusted in the operating margin of the comparables, not the respondent-assessee.The Tribunal held that adjustments should be made to the margins of the comparables, not the respondent-assessee, citing the decision in the case of ACIT vs. Nord Drive Systems Pvt. Ltd. Therefore, the Tribunal directed the Assessing Officer/TPO to adjust the margins of the comparables, reversing the CIT(A)'s order to this extent.2. Technical Services Fees Adjustments:The TPO had determined the Arm's Length Price (ALP) for technical services fees at Rs. Nil, as the respondent-assessee failed to demonstrate the necessity and actual conditions of services. The CIT(A), however, concluded that the respondent-assessee had availed technical services from its AEs, based on additional evidence provided, and found fault with the TPO for not benchmarking the transactions using one of the prescribed methods.The Revenue argued that there was no necessity for technical services fees as the respondent-assessee was engaged only in trading activities and had not demonstrated the benefits of such services. The respondent-assessee, on the other hand, relied on several judicial decisions, including the Hon’ble Bombay High Court's decision in the case of CIT vs. M/s. Johnson & Johnson Ltd., which held that ALP adjustments cannot be made without adopting one of the mandatory prescribed methods.The Tribunal upheld the CIT(A)'s order, stating that the necessity of incurring expenditure on technical services is within the exclusive domain of the respondent-assessee. It also referred to the decision of the Hon’ble Bombay High Court in the case of CIT vs. M/s. Merck Ltd., which held that not adopting one of the prescribed methods to determine the ALP makes the entire TP study unsustainable in law.Conclusion:The Tribunal partly allowed the Revenue's appeal, directing adjustments to the margins of the comparables for customs duty but upheld the CIT(A)'s order regarding the technical services fees. The decision emphasized the importance of following prescribed methods for determining ALP and appropriate adjustments to comparables' margins in TP cases.