Tribunal emphasizes accurate transfer pricing in international transactions

The Tribunal partly allowed the appeal, emphasizing the importance of accurate transfer pricing adjustments based on international transactions. It highlighted the need to adhere to prescribed methods and consider transaction nature for assessments. The Tribunal set aside the transfer pricing adjustment calculation, instructing verification and adjustments by the Assessing Officer/Transfer Pricing Officer, granting the appellant a hearing in fresh proceedings. The decision was delivered on 16th February 2021 by the Tribunal, comprising Vice President Shri R.S. Syal and Judicial Member Shri S.S. Viswanethra Ravi. Legal representatives were Ms. Pallavi Dinodia for the Assessee and Shri Krishna Kumar Mishra for the Revenue.

---

---

Issues:
Transfer pricing adjustment, Entity level transactions, International transactions, TNMM method, Arm's Length Price, Operating revenue, Operating costs, Comparable companies, Profit level indicator, Transfer pricing adjustment calculation, Manufacturing activity transactions, Designing & Product Development Charges, Balance sheet items, ALP determination, Dispute Resolution Panel, Appeal to Tribunal.

Detailed Analysis:

Transfer Pricing Adjustment:
The appeal revolves around the transfer pricing addition of Rs. 13,10,50,362/- made by the Assessing Officer (AO). The Tribunal focused on the correctness of the transfer pricing adjustment at the entity level rather than transactions with Associated Enterprises (AEs). The TPO applied the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of international transactions, resulting in the proposed adjustment.

Entity Level Transactions vs. International Transactions:
The Tribunal emphasized that transfer pricing adjustments should be limited to international transactions, not entity level transactions. Section 92 of the Income-tax Act specifies that ALP and transfer pricing adjustments apply only to international transactions. The TPO's approach of calculating adjustments at the entity level was deemed incorrect.

Nature of Transactions and PLI Calculation:
The TNMM was applied to transactions involving both expenses and revenue. The TPO used the PLI of Operating Profit to Operating Revenue ratio of comparables to calculate the adjustment. The Tribunal highlighted the need to segregate expenses and revenue transactions for accurate transfer pricing adjustments.

Designing & Product Development Charges:
A specific issue arose regarding the Designing & Product Development Charges transaction, which was considered a balance sheet item. The Tribunal directed the AO/TPO to verify if this transaction was part of the total figure of Intangible Assets in the Fixed Assets schedule, potentially affecting the transfer pricing adjustment.

Calculation and Adjustment Reassessment:
The TPO's transfer pricing adjustment calculation was challenged for not considering the proportionate adjustment for expenses transactions. The Tribunal set aside the order, instructing the AO/TPO to verify the figures provided by the appellant and make adjustments accordingly. The appellant was granted a hearing in the fresh proceedings.

Conclusion:
The appeal was partly allowed for statistical purposes, emphasizing the need for accurate transfer pricing adjustments based on international transactions. The Tribunal's decision highlighted the importance of adhering to the prescribed methods and considering the nature of transactions for transfer pricing assessments.

Judgment Delivery:
The order was pronounced in the Open Court on 16th February 2021 by the Tribunal, comprising Shri R.S. Syal, Vice President, and Shri S.S. Viswanethra Ravi, Judicial Member. The legal representatives for the Assessee and Revenue were Ms. Pallavi Dinodia and Shri Krishna Kumar Mishra, respectively.

---