2022 (9) TMI 287 - AT - Income Tax

Tribunal rules in favor of assessee on transfer pricing issues 'sLengthPrice

The Tribunal allowed the assessee's appeals for both assessment years, following the High Court's decisions in the assessee's previous case. It upheld ... ALP determination - tested party for the purpose of determining the ALP - whether the AEs can be considered as a tested party as per Indian Transfer Pricing Regulation? - HELD THAT:- As respectfully following the ratio laid down by the Hon’ble Court [2022 (2) TMI 1063 - CALCUTTA HIGH COURT] hold that AEs can be selected as tested party and, thus, reverse the finding of the ld. CIT(A) and allow the common ground raised by the assessee for AY 2014-15 & 2015-16. International Transaction of purchase of finished goods from AEs and receipt of commission from the AEs - HELD THAT:- As in assessee's own case HC [2022 (2) TMI 1063 - CALCUTTA HIGH COURT] as held DRP, on noting that such issue was raised by the assessee before it for the first time, forwarded the contention to the TPO for his consideration and submit a remand report. The TPO in his remand report held that the segmentation of profitability provided by the assessee has no basis and is far fetched and not audited. Upon consideration of the remand report submitted by the TPO, the DRP accepted the same and denied relief to the assessee for the assessment year 2012-13. However, for the assessment year 2013-14 and the subsequent assessment year 2014-15 the DRP has accepted the stand of the assessee with regard to the segmentation of the profitability. These factors were taken into consideration by the Tribunal and on facts it was noted that the adjustment can be made only on the basis of the transaction and not on aggregation and, accordingly, accepted the segmentation analysis of the assessee.- Decided in favour of assessee. Disallowance of administrative support services and IT support services which were held to be in the nature of stewardship services and other expenditure claimed - HELD THAT:- As administrative support services and IT support services being not in the nature of stewardship services and ld. D/R having failed to controvert this fact. We, therefore, respectfully following the ratio laid down by the Hon’ble Court [2022 (2) TMI 1063 - CALCUTTA HIGH COURT] and observing that there is no change of facts in the instant case, reverse the finding of the ld. CIT(A) and allow the above stated ground raised by the assessee for AY 2015-16. Issues Involved:1. General ground challenging the order of the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP).2. International transaction - purchase of raw materials.3. International transactions - purchase of finished goods and receipt of commission.4. Incorrect computation of the appellant's Profit Level Indicator (PLI).5. Disallowance of interest paid under section 201(1A) of the Income Tax Act.6. International transaction - Payment for Administrative Support Services and IT Support Services (specific to AY 2015-16).Issue-wise Analysis:1. General Ground:The assessee challenged the order passed by the TPO under section 92CA(3) of the Income Tax Act, which was partially confirmed by the DRP and incorporated by the AO in the assessment order under section 143(3) read with section 144C of the Act. The Tribunal noted that the issues raised were common across both assessment years and were adjudicated together for convenience.2. International Transaction - Purchase of Raw Materials:The assessee argued that the DRP failed to consider its 'entrepreneurial' functional, asset, and risk (FAR) profile. The DRP concluded that the Associated Enterprise (AE) could not be considered the least complex entity, which contradicted the arm's length principle, OECD guidelines, UN guidelines, and legal jurisprudence. The Tribunal referenced the Hon'ble Jurisdictional High Court's decision in the assessee's own case for earlier assessment years, which allowed the AE to be considered as the tested party. The Tribunal upheld this view, reversing the DRP's finding and allowing the assessee's ground.3. International Transactions - Purchase of Finished Goods and Receipt of Commission:The assessee contended that the TPO and AO failed to consider the profitability evidenced by the audited trading segment and did not provide cogent reasoning for determining the Arm's Length Price (ALP). The Tribunal, following the Hon'ble Jurisdictional High Court's decision in the assessee's case for previous years, found that the TPO should consider the segmental profitability and not the entity level margins. The Tribunal reversed the DRP's finding and allowed the assessee's ground.4. Incorrect Computation of the Appellant's PLI:The assessee argued that the TPO and AO erred in considering realized foreign exchange loss and losses due to fraud as operating in nature, resulting in an inflated Transfer Pricing Adjustment (TPA). However, the Tribunal noted that the assessee did not press this ground for both assessment years, and it was dismissed as not pressed.5. Disallowance of Interest Paid Under Section 201(1A) of the Act:The assessee claimed that the AO erred in disallowing interest paid under section 201(1A), treating it as penal in nature rather than compensatory and thus allowable under section 37 as business expenditure. The Tribunal noted that the assessee did not press this ground for AY 2014-15, and it was dismissed as not pressed.6. International Transaction - Payment for Administrative Support Services and IT Support Services (AY 2015-16):The assessee argued that the DRP, TPO, and AO erred in rejecting the economic analysis of services received from AEs and determining the ALP as nil. The Tribunal referenced the Hon'ble Jurisdictional High Court's decision, which found that the administrative and IT support services provided by the AE were not in the nature of stewardship functions and were essential for the assessee's operations. The Tribunal reversed the DRP's finding and allowed the assessee's ground for AY 2015-16.Conclusion:The Tribunal allowed the assessee's appeals for both assessment years, following the Hon'ble Jurisdictional High Court's decisions in the assessee's own case for earlier years. The Tribunal upheld the view that AEs can be considered as tested parties and that segmental profitability should be considered for determining ALP. The grounds related to incorrect computation of PLI and disallowance of interest under section 201(1A) were dismissed as not pressed. The issue regarding administrative support services and IT support services was decided in favor of the assessee for AY 2015-16.