Tribunal Limits Transfer Pricing Adjustments, Requires Consistent Treatment of VRS Expenses

The tribunal ruled that transfer pricing adjustments are limited to international transactions only, not entity-level transactions. It directed the adjustment to be restricted to international transactions, granting the assessee a hearing opportunity. Additionally, the tribunal required consistent treatment of VRS expenses in the operating cost base for the assessee and a comparable company, setting aside the order to include VRS costs for the comparable company in line with the assessee's treatment. The appeal was partly allowed based on these decisions, clarifying transfer pricing rules and expense treatment for operating profit margins.

---

---

Issues:
1. Transfer pricing adjustment limited to international transactions.
2. Treatment of VRS expenses in operating cost base.

Issue 1: Transfer pricing adjustment limited to international transactions

The appeal was against the final assessment order concerning the assessment year 2013-14. The dispute revolved around restricting the transfer pricing adjustment to international transactions only. The assessee, an Indian company, engaged in textile machinery manufacturing, had reported international transactions in Form No. 3CEB. The TPO proposed a transfer pricing adjustment based on external TNMM, resulting in a significant adjustment. The contention was that the adjustment should apply only to international transactions, not entity-level transactions. The tribunal held that as per Section 92 of the Income-tax Act, transfer pricing adjustments are intended for international transactions only, not entity-level transactions. The tribunal directed the adjustment to be restricted to international transactions, providing the assessee with a hearing opportunity.

Issue 2: Treatment of VRS expenses in operating cost base

An additional ground raised was the treatment of VRS expenses in the operating cost base. The assessee argued that VRS expenses should be considered in the operating cost base for both the assessee and the comparable company, Veejay Lakshmi Engineering Works Ltd. The tribunal admitted this ground based on legal precedence. The TPO had included VRS expenses in the operating costs of the assessee but not in the case of the comparable company. The tribunal emphasized that similar expenses should be treated consistently across comparable companies. Upon review, it was found that Veejay Lakshmi Engineering Works Ltd. had not included VRS expenses in its operating cost base. Therefore, the tribunal set aside the order and directed the inclusion of VRS costs for the comparable company in a manner consistent with the assessee, providing a hearing opportunity. The appeal was partly allowed based on these findings.

In conclusion, the tribunal's judgment addressed the issues of limiting transfer pricing adjustments to international transactions and ensuring consistent treatment of VRS expenses in the operating cost base for the assessee and comparable companies. The decision provided clarity on the application of transfer pricing rules and the treatment of specific expenses in determining operating profit margins.

---