Transfer pricing adjustments cannot switch methods arbitrarily without justification after finding arm's length pricing

ITAT Mumbai ruled on multiple transfer pricing and tax issues. The tribunal dismissed the assessee's challenge regarding lack of personal hearing before TPO reference, following Vodafone India Services precedent that hearing is required only when Chapter X applicability is contested. On transfer pricing adjustments for export transactions, ITAT favored the assessee, holding that authorities cannot arbitrarily switch from TNMM to CUP method without justification after finding arm's length pricing. For corporate guarantee transactions, the tribunal upheld 1.5% rate as reasonable. Issues regarding section 14A disallowance and section 35(2AB) weighted deduction were remitted to AO for factual verification and fresh consideration.

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Issues Involved:
1. Adjustment to the international transaction relating to export of goods.
2. Adjustment to the international transaction relating to corporate guarantee.
3. Disallowance under section 14A of the Income-tax Act, 1961.
4. Disallowance under section 35(2AB) of the Income-tax Act, 1961.
5. Legality of the reference made to the Transfer Pricing Officer without giving the assessee an opportunity of being heard.

Detailed Analysis:

1. Adjustment to the International Transaction Relating to Export of Goods:

The primary issue was the upward adjustment of Rs. 13,55,73,433/- and Rs. 13,16,87,917/- for the assessment years 2012-13 and 2013-14 respectively. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) rejected the Transactional Net Margin Method (TNMM) used by the assessee and instead applied the Comparable Uncontrolled Price (CUP) method, citing discrepancies in the sale prices to Associated Enterprises (AE) and non-AE entities. The assessee argued that TNMM had been consistently used and accepted in previous years, and no cogent reason was provided for the change. The Tribunal found that the AO and DRP did not justify the switch from TNMM to CUP method, noting that consistency should be maintained unless there is a change in facts or law. Consequently, the Tribunal decided in favor of the assessee, reinstating the use of TNMM and dismissing the adjustment.

2. Adjustment to the International Transaction Relating to Corporate Guarantee:

For the assessment years 2012-13 and 2013-14, the AO made upward adjustments of Rs. 1,19,960/- and Rs. 5,44,243/- respectively, arguing that the corporate guarantee provided by the assessee to its AE was not at arm's length. The DRP reduced the corporate guarantee rate from 2.25% to 1.5%. The Tribunal upheld the DRP’s decision, agreeing that the adjustments were reasonable and in line with the prevailing guidelines and judicial precedents.

3. Disallowance Under Section 14A of the Income-tax Act, 1961:

For the assessment year 2012-13, the AO disallowed Rs. 7,41,654/- under section 14A r.w.r. 8D, which was over and above the sum of Rs. 4,86,322/- disallowed by the assessee suo-moto. The DRP directed the AO to verify the facts and adjust the disallowance accordingly. The Tribunal noted that no disallowance under section 14A is required when no exempt income has been earned, remitting the issue back to the AO for factual verification.

4. Disallowance Under Section 35(2AB) of the Income-tax Act, 1961:

For the assessment year 2013-14, the AO disallowed Rs. 6,66,30,953/- claimed by the assessee under section 35(2AB) due to the absence of necessary certificates in Form 3CL and Form 3CM. The DRP upheld the disallowance, stating that statutory approvals were required. The Tribunal remitted the issue back to the AO for fresh consideration, allowing the assessee to submit the necessary certificates.

5. Legality of the Reference Made to the Transfer Pricing Officer Without Giving the Assessee an Opportunity of Being Heard:

The assessee claimed that the AO’s reference to the Transfer Pricing Officer (TPO) without an opportunity of being heard violated section 92CA of the Income-tax Act. The Tribunal admitted this additional ground but found no merit in the assessee's claim. It noted that the assessee did not object to the transactions being treated as international transactions and that the AO’s prima facie view was sufficient for referring the matter to the TPO. The Tribunal dismissed the additional ground, emphasizing that the requirement for a hearing applies only when the jurisdiction to tax under Chapter X is challenged by the assessee.

Conclusion:

The Tribunal partly allowed the assessee’s appeals, setting aside the adjustments related to the export of goods and remitting the issues related to section 14A disallowance and section 35(2AB) deduction back to the AO for further examination. The adjustments related to the corporate guarantee were upheld. The additional ground regarding the legality of the reference to the TPO was dismissed.

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