2016 (9) TMI 244 - HC - Income Tax

Delhi High Court affirms ITAT ruling on Arms Length Price in international transactions

The High Court of Delhi upheld the decision of the Income Tax Appellate Tribunal (ITAT) in a case involving the determination of Arms Length Price (ALP) ... Arms Length Price - Transfer Pricing Officer's choice of transfer pricing method - Transactional Net Margin Method - Comparable Uncontrolled Price method - Profit Level Indicator - Composite agreement and non-severability of services - Judicial review of plausibility of factual conclusionsArms Length Price - Transfer Pricing Officer's choice of transfer pricing method - Transactional Net Margin Method - Comparable Uncontrolled Price method - Profit Level Indicator - Validity of the TPO's adjustment based on applying the CUP method in place of the TNMM adopted by the assessee and the consequent transfer pricing adjustment. - HELD THAT: - The Court examined the orders of the TPO, the CIT(A) and the ITAT and accepted the ITAT's approach that viewed the transactions and agreement holistically. The ITAT restricted the adjustment made by the TPO and concluded that the view it adopted was a plausible appreciation of facts and transfer pricing methodology. The High Court declined to substitute its own view where the Tribunal's conclusion on choice and application of transfer pricing method was tenable on the record. [Paras 3, 4, 5]The TPO's larger adjustment based on CUP was not interfered with; the ITAT's restriction of the adjustment is upheld as a plausible conclusion.Composite agreement and non-severability of services - Arms Length Price - Whether the composite agreement between the assessee and its associated enterprise could be split so that some services are held at arm's length while others are adjusted. - HELD THAT: - The ITAT, as accepted by the High Court, viewed the agreement as a composite arrangement and held that it was not open to the TPO to dissect the agreement and treat parts of the services as providing no actual benefit to the assessee for the purpose of transfer pricing adjustments. The High Court found this approach tenable and declined to disturb the Tribunal's conclusion. [Paras 3, 4]The agreement is to be treated as a composite one and cannot be split for applying separate arm's length adjustments; the TPO cannot sever services on the ground that some did not confer actual benefit.Final Conclusion: The High Court found the ITAT's conclusions on the transfer pricing adjustments and on treating the agreement as a composite arrangement to be plausible and declined to interfere; no substantial question of law arises and the Revenue's appeals are dismissed. Issues:Determination of Arms Length Price (ALP) by Transfer Pricing Officer (TPO) in international transactions involving the Assessee and its Associated Enterprise (AE).Analysis:The High Court of Delhi heard appeals by the Revenue challenging an order passed by the Income Tax Appellate Tribunal (ITAT) regarding the determination of the Arms Length Price (ALP) by the Transfer Pricing Officer (TPO) in international transactions. The Assessee had adopted the Transactional Net Margin Method (TNMM) using Operating Profit/Total Cost as the profit level indicator (PLI). However, the TPO applied the Comparable Uncontrolled Price (CUP) method and made adjustments, leading to the assessment by the Assessing Officer (AO) on 1st February 2011.The Commissioner of Income Tax (Appeals) restricted the transfer pricing adjustment, but the Assessee contended that the agreement with its Associated Enterprise was composite and could not be split for determining arm's length services. The ITAT agreed with the Assessee's contention, viewing the agreement as a whole and stating that it was not the TPO's purview to assess the actual benefit of services to the Assessee.After considering the submissions, the Court found the ITAT's view plausible and declined to interfere. It was concluded that no substantial question of law arose for determination, leading to the dismissal of the appeals by the Revenue.