2018 (5) TMI 900 - AT - Income Tax

Tribunal overturns adjustments, directs deletion of arm's length price adjustments for export of PCBs.

AT And S India (P) Ltd. Versus D.C.I.T, Circle-11 (1), Kolkata

AT And S India (P) Ltd. Versus D.C.I.T, Circle-11 (1), Kolkata - TMI Issues Involved:1. Arm's length price adjustment for export of printed circuit boards (PCBs) to Associated Enterprise (AE).2. Disallowance of payments made to AE for purchase and order handling services and sales services.Detailed Analysis:Issue 1: Arm's Length Price Adjustment for Export of PCBs to AEThe main grievance of the assessee was the adjustment of Rs. 90,32,40,004 to the total income concerning the international transaction involving the export of PCBs to its AE. The assessee argued that the transaction was at arm's length under the Comparable Uncontrolled Price (CUP) Method, as confirmed by the Jurisdictional Tribunal for AY 2011-12. The Transfer Pricing Officer (TPO) characterized the assessee as a contract manufacturer rather than a full-fledged manufacturer, leading to the adjustment.The TPO's characterization was based on the observation that 92.33% of the assessee’s production was sold to the AE, and a significant portion of raw materials and spare parts were imported from the AE. The TPO applied the Transactional Net Margin Method (TNMM) instead of the CUP method, leading to the adjustment.The Dispute Resolution Panel (DRP) confirmed the TPO's stand, stating that the AE performed significant functions beyond mere distribution, making the CUP method inapplicable. The DRP noted that the AE retained its commission while making remittances to the assessee, indicating that the AE was not a mere pass-through entity.Upon appeal, the Tribunal noted that the identical issue was covered in favor of the assessee by the Jurisdictional Tribunal in AY 2011-12, where the CUP method was deemed appropriate. The Tribunal emphasized the principle of consistency and found no change in facts or law. Therefore, the Tribunal directed the deletion of the arm's length adjustment of Rs. 90,32,40,004.Issue 2: Disallowance of Payments for Purchase and Order Handling Services and Sales ServicesThe second issue involved the disallowance of Rs. 9,97,50,264 made by the TPO for payments to the AE for purchase and order handling services and sales services. The TPO determined the arm's length price of these services at NIL, alleging that they were shareholder activities and that the assessee failed to satisfy the benefit test.The DRP upheld the TPO's decision, stating that the services did not result in tangible benefits to the assessee and were routine in nature. The DRP emphasized that the assessee failed to provide sufficient evidence to demonstrate the benefits derived from these services.The Tribunal noted that the TPO/AO determined the arm's length price without applying any of the methods prescribed under section 92C(1) of the Act, violating the provisions of section 92C(3). The Tribunal referred to the decision in NLC Nalco (India) Ltd. vs. DCIT, where the TPO's determination of NIL value based on the benefit test without applying any prescribed method was deemed incorrect.The Tribunal also considered the principle of consistency, noting that no adjustments were made by the TPO in the previous three assessment years (AY 2009-10, AY 2010-11, and AY 2011-12) on the same facts and circumstances. The Tribunal emphasized that the AO did not make any adverse comments under section 37 of the Act regarding the services received, indicating that the services were indeed beneficial.The Tribunal concluded that the assessee had provided sufficient evidence to demonstrate the benefits derived from the services and directed the deletion of the arm's length price adjustment of Rs. 9,97,50,264.Conclusion:The Tribunal allowed the appeal filed by the assessee, directing the deletion of the arm's length price adjustments for both the export of PCBs and the payments for purchase and order handling services and sales services. The Tribunal emphasized the principles of consistency and the necessity to apply prescribed methods under section 92C of the Act.