2023 (3) TMI 968 - AT - Income Tax

Tribunal Orders Re-examination of Transfer Pricing Methods for Capital & Finished Goods Transactions 'sLengthPrice

The tribunal directed a fresh examination by the AO/TPO to determine the most suitable method for benchmarking transactions related to the purchase of ... Transfer pricing - Arm's length price - Most appropriate method - Transactional Net Margin Method (TNM) - Resale Price Method (RPM) - internal comparable uncontrolled price (internal CUP) - bench-marking of international transactions - amortization of premium on leasehold land - disallowance of depreciation - computation of book profits under section 115JBTransfer pricing - Arm's length price - Transactional Net Margin Method (TNM) - bench-marking of international transactions - Transfer pricing adjustment in respect of purchase of capital goods from Associated Enterprise remanded for fresh examination - HELD THAT: - The Tribunal found that the assessee's use of TNM was not appropriate because purchases of capital goods do not directly enter the profit and loss account except through depreciation. The TPO's alternative approach-treating the foreign AE as tested party and comparing it with Indian marketing-support companies-was also held inappropriate. The Tribunal noted the assessee's contention that functions of the comparables do not match the AE and that its submissions were not properly considered. The Tribunal observed that margins earned by the AE in transactions with non-AEs may be relevant where AE is the tested party, but left it open for consideration by the AO/TPO. For these reasons the matter was restored to the file of the AO/TPO for selection of the most appropriate method and fresh bench-marking of the purchase of capital goods in accordance with law.Issue restored to AO/TPO for fresh examination and bench-marking of capital-goods purchases adopting the most appropriate method.Transfer pricing - Arm's length price - Resale Price Method (RPM) - internal comparable uncontrolled price (internal CUP) - Transfer pricing adjustment in respect of purchase of finished goods from Associated Enterprise remanded for fresh examination - HELD THAT: - The assessee adopted RPM but also purchased identical finished goods from non-AEs; the Tribunal accepted the assessee's contention that internal CUP may be the most appropriate method where comparable internal purchases exist. The Tribunal held that whether the finished goods were later sold at loss or profit is not determinative of the ALP of the purchase price. The Tribunal also recorded that any adjustment should be restricted to purchases made from the AE and directed the AO/TPO to afford the assessee opportunity to furnish relevant details and to determine ALP afresh using the most appropriate method.Issue set aside and restored to AO/TPO for re-determination of ALP of finished-goods purchases from AE (adjustment, if any, to be restricted to purchases from the AE).Amortization of premium on leasehold land - bench-marking of judicial decision - Claim of amortization of premium paid for leasehold land remanded for compliance with pending High Court decision - HELD THAT: - The assessee informed the Tribunal that an identical issue for an earlier assessment year is pending before the Hon'ble Bombay High Court and that Form No.8 under section 158(1) has been filed accepting the applicability of that decision. Having regard to these submissions and the pendency before the High Court, the Tribunal directed that the issue be restored to the file of the AO with instructions to follow the decision that may be rendered by the Hon'ble Bombay High Court on the identical issue.Issue restored to AO to act in accordance with the decision of the Hon'ble Bombay High Court on the identical issue.Disallowance of depreciation - consequential adjustment - Disallowance of depreciation remanded for reconsideration consequential to earlier set-aside proceedings - HELD THAT: - The Tribunal noted that the AO's disallowance in the year under appeal arose as a consequence of an earlier disallowance in AY 2006-07, which the Tribunal has restored to the file of the AO for re-examination. In view of that prior restoration, the Tribunal found it appropriate that the depreciation-disallowance in the present year be reconsidered by the AO afresh in light of the outcome of the set-aside proceedings for AY 2006-07 and accordingly restored the issue to the AO.Issue restored to AO for fresh examination in the light of the AO's reconsideration in AY 2006-07 set-aside proceedings.Computation of book profits under section 115JB - direction of Dispute Resolution Panel - Whether additions for amortization of premium and disallowance of depreciation should be included while computing book profits under section 115JB - HELD THAT: - The DRP had directed the AO not to make the additions of amortization of premium and disallowance of depreciation while computing book profits under section 115JB. The Tribunal observed that the AO had not implemented the DRP's directions and therefore directed the AO to comply with the DRP's directions on computation of book profits.AO directed to implement the DRP's directions and exclude the specified additions while computing book profits under section 115JB.Final Conclusion: The Tribunal has restored the transfer-pricing issues relating to purchases of capital goods and finished goods to the AO/TPO for fresh determination using the most appropriate method; remanded the claims on amortization of leasehold-premium and depreciation for reconsideration in light of pending or prior set-aside proceedings; and directed the AO to implement the DRP's directions in computing book profits under section 115JB. The appeal is treated as allowed for statistical purposes. Issues involved:1. Transfer Pricing adjustment for purchase of capital goods from Associated Enterprise (AE)2. Transfer Pricing adjustment for purchase of finished goods from AE3. Disallowance of claim of amortization of premium paid for leasehold land4. Disallowance of depreciation on additions to fixed assets made during the period relevant to AY 2006-075. Computation of Book profits u/s 115JB of the ActIssue 1 - Transfer Pricing adjustment for purchase of capital goods from AE:The assessee challenged the transfer pricing adjustment made for purchasing capital goods from its AE. The Transfer Pricing Officer (TPO) disagreed with the assessee's study and made adjustments. The tribunal found the TNM method adopted by the assessee inappropriate and directed a fresh examination by the AO/TPO to determine the most suitable method for benchmarking the transactions.Issue 2 - Transfer Pricing adjustment for purchase of finished goods from AE:The TPO made adjustments for the purchase of finished goods from the AE. The tribunal set aside the order and directed the AO/TPO to determine the ALP of purchase of finished goods using the most appropriate method. The adjustment should be limited to purchases from the AE, and the assessee must provide all relevant details.Issue 3 - Disallowance of claim of amortization of premium paid for leasehold land:The tribunal restored the issue to the AO to follow the decision of the High Court on a similar issue pending from a previous assessment year.Issue 4 - Disallowance of depreciation on additions to fixed assets:The tribunal decided to restore this issue to the AO for re-examination in light of the decision taken in a previous assessment year regarding the disallowance of depreciation.Issue 5 - Computation of Book profits u/s 115JB of the Act:The tribunal directed the AO to comply with the directions given by the Dispute Resolution Panel regarding the computation of book profits under section 115JB of the Act.In conclusion, the appeal of the assessee was treated as allowed for statistical purposes, and various issues related to transfer pricing adjustments, disallowances, and computation of book profits were subject to further examination and directions by the tribunal.