Tribunal rules in favor of assessee on international transaction adjustments, directs re-computation & emphasizes commercial expediency

The Tribunal allowed the appeal in favor of the assessee concerning adjustments related to international transactions. Regarding the adjustment for manufacturing operations, the Tribunal directed the Assessing Officer to recompute the arm's length margin by including a previously excluded comparable company. For the adjustment related to management services, the Tribunal ruled in favor of the assessee, emphasizing that the determination of arm's length price should not question the commercial expediency of services. The Tribunal deleted the arm's length price adjustment made by the Transfer Pricing Officer. Other grounds of appeal were not pursued. The decision was pronounced on March 8, 2019.

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Issues Involved:

1. Adjustment relating to international transaction pertaining to manufacturing operation.
2. Adjustment relating to international transactions pertaining to availing of management services.

Issue-wise Detailed Analysis:

1. Adjustment relating to international transaction pertaining to manufacturing operation:

The assessee challenged the upward adjustment of INR 207,021,190 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under the directions of the Dispute Resolution Panel (DRP) for the purchase of raw material. The TPO applied a 75% import content filter, narrowing down the comparable cases to DCW Ltd, Finolex Ltd, Kemrock Industries Ltd, and Supreme Petrochem Ltd. However, DCW Ltd and Kemrock Industries Ltd were excluded due to different accounting years and product profiles. The final comparables were Finolex Ltd and Supreme Petrochem Ltd, resulting in an arm's length price adjustment of INR 20,70,21,190.

The Tribunal noted that the exclusion of DCW Ltd was not justified as it did not consistently incur losses for three consecutive years, as required by Rule 10B(4). The Tribunal directed the AO to recompute the arm's length margin after including DCW Ltd as a valid comparable. Consequently, other grievances related to this adjustment were deemed academic and not addressed further. The Tribunal allowed ground nos. 1 to 7 for statistical purposes.

2. Adjustment relating to international transactions pertaining to availing of management services:

The assessee contested the adjustment of INR 31,458,460 made for management services fees paid to associated enterprises. The TPO rejected the Transactional Net Margin Method (TNMM) used by the assessee and applied the Comparable Uncontrolled Price (CUP) method, determining the arm's length price at "NIL" without identifying comparable uncontrolled transactions.

The Tribunal observed that the issue was covered in favor of the assessee by decisions in its own cases for preceding assessment years. It emphasized that the benefit test and actual receipt of services are irrelevant for determining the arm's length price. The Tribunal noted that the TPO's approach of questioning the commercial expediency of the services and determining their worth was not sustainable in law. It held that the CUP method requires comparable uncontrolled transactions, which were not identified by the TPO.

The Tribunal found reasonable evidence of the rendition of services and concluded that the TPO's subjective perception about the worth of services was not a valid basis for adjustment. It deleted the ALP adjustment of INR 31,458,460 and allowed ground nos. 8 to 12 in favor of the assessee.

Other Grounds:

The other grounds of appeal were not pressed before the Tribunal.

Conclusion:

The appeal was allowed in the terms indicated above and pronounced in the open court on March 8, 2019.

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