2018 (4) TMI 383 - AT - Income Tax

Tribunal Overturns Transfer Pricing Adjustment, Emphasizes Limited Scope

The Tribunal set aside the transfer pricing adjustment made by the TPO, remanding the matter to the AO/TPO for reconsideration. The Tribunal emphasized ... Addition on account of transfer pricing adjustment - transactions with the non-AEs - Provision of software development services - Held that:- As the entire exercise under Chapter-X of the Act is confined to computing total income of the assessee from international transactions having regard to the arm’s length price, there is no scope for computing income from non-international transactions also having regard to the ALP. Since the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of ‘Total costs’, also inclusive of costs relevant for transactions with non-AEs, we cannot countenance such a point of view. Hon’ble Delhi High Court in CIT VS. Keihin Panalfa Ltd. (2016 (5) TMI 203 - DELHI HIGH COURT), in which it has been held that the transfer pricing adjustment can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has proposed/made the addition on the basis of transactions even with non- AEs, we set aside the impugned order and send the matter back to the file of the AO/TPO for deciding the issue afresh as per law after allowing a reasonable opportunity of hearing to the assessee. In deciding the issue afresh, it will be open to the TPO/assessee to depart from the earlier stand and take into consideration later developments in law having bearing on the issue, wherever applicable Issues:- Addition on account of transfer pricing adjustmentAnalysis:The appeal was against the final assessment order passed by the Assessing Officer (A.O.) regarding the assessment year 2013-14, specifically challenging the addition on account of transfer pricing adjustment amounting to Rs. 16,26,63,782. The Assessing Officer made reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the international transactions, particularly 'Provision of software development services'. The TPO rejected the separate operating profit margin declared by the assessee and calculated the transfer pricing adjustment based on the overall profit of the assessee. The Dispute Resolution Panel (DRP) gave directions, leading to a revised transfer pricing adjustment of Rs. 16,26,63,782. The primary issue raised was the validity of this transfer pricing adjustment.The Tribunal observed that the TPO had considered total operating costs for both associated enterprises (AEs) and non-AEs while calculating the transfer pricing adjustment. However, the law restricts transfer pricing adjustments to international transactions with AEs only, not non-AEs. The Tribunal referred to judgments by the Delhi High Court and Bombay High Court to support this position. As the TPO had proposed adjustments for non-AE transactions as well, the Tribunal set aside the order and remanded the matter to the AO/TPO for a fresh decision, emphasizing adherence to the law and providing the assessee with a fair opportunity to present their case.The Tribunal concluded that transfer pricing adjustments cannot be made on transactions with non-AEs and should be limited to international transactions with AEs. The matter was remanded to the AO/TPO for fresh consideration in accordance with the law and ensuring the assessee's right to a fair hearing. The appeal was allowed for statistical purposes, and the stay application was dismissed as infructuous. The assessee was granted a reasonable opportunity to present their case in the fresh proceedings.