Tribunal dismisses Revenue's appeal on Cash Profit Level Indicator & custom duty adjustment.

The Tribunal dismissed both the Revenue's appeal and the assessee's cross objection, with the decision being announced on 28th November, 2019. The Revenue's grounds challenging the DRP's directions on Cash Profit Level Indicator (PLI) and custom duty adjustment were deemed not maintainable as they were based on concessions by the Transfer Pricing Officer during remand proceedings. The Tribunal emphasized that under section 253(2A) of the Act, the Revenue cannot appeal against directions based on such concessions.

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Issues Involved:

1. Whether the Dispute Resolution Panel (DRP) was correct in law and on facts in directing to allow Cash Profit Level Indicator (PLI) to the assessee.
2. Whether the DRP was right in law and on facts in accepting the contention of the assessee to grant custom duty adjustment in the assessee’s PLI.

Issue-wise Detailed Analysis:

1. Cash Profit Level Indicator (PLI):

The Revenue contended that the DRP erred in allowing Cash PLI for the assessee, arguing that cash profit ratio is not a valid PLI under Indian Transfer Pricing Regulations. The Tribunal analyzed Rule 10B(1)(e) of the Income-tax Act, which mandates the use of "Net Operating Margin" for benchmarking under the Transactional Net Marginal Method (TNMM). The Tribunal emphasized that "Net Profit" or "Operating Profit" must include depreciation as it is an integral part of operating costs. This interpretation was supported by the Supreme Court in DIT (IT) Vs. Morgan Stanley & Company and the Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd.

Despite acknowledging the legal correctness of the Revenue's position, the Tribunal noted that the DRP's direction to adopt Cash PLI was based on a concession by the Transfer Pricing Officer (TPO) during remand proceedings. The TPO, in his remand report, agreed with the assessee's contention for adopting Cash PLI. The Tribunal highlighted that under section 253(2A) of the Act, the Revenue cannot appeal against a direction of the DRP if it is based on a concession by the AO/TPO. Consequently, the Tribunal dismissed the Revenue's ground as not maintainable.

2. Custom Duty Adjustment:

The Revenue challenged the DRP's decision to grant custom duty adjustment in the assessee's PLI instead of the comparables. The Tribunal referred to Rule 10B(1)(e)(iii), which stipulates that adjustments for differences should be made in the profit margins of the comparables, not the assessee. However, the DRP's direction was again based on the TPO's concession during remand proceedings. The TPO, in his remand report, agreed with the assessee's calculation and contention regarding custom duty adjustment.

The Tribunal reiterated that when the DRP's direction is based on the TPO's concession, the Revenue cannot challenge it before the Tribunal. Thus, the Tribunal dismissed this ground of the Revenue's appeal as not maintainable.

Cross Objection by the Assessee:

The assessee's counsel stated that the cross objection would not be pressed if the Departmental appeal was dismissed. Given the dismissal of the Departmental appeal, the cross objection was also dismissed as 'not pressed'.

Conclusion:

The Tribunal dismissed both the Revenue's appeal and the assessee's cross objection. The order was pronounced in the Open Court on 28th November, 2019.

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