2023 (8) TMI 210 - AT - Income Tax

Tribunal orders reassessment on Transfer Pricing and fixed asset mark-up, stresses comprehensive review.

AVL Technical Centre Pvt. Ltd. Versus DCIT, Circle : 3 (2) New Delhi

The Tribunal remanded the case to the Assessing Officer for de-novo consideration on Transfer Pricing adjustments and disallowance of mark-up on fixed ... TP Adjustment - disallowance of 5% marked up in relation to purchase of certain fixed assets (i.e. Smoke Meter and Heating Channel) and a non consideration of evidence in respect of the same - HELD THAT:- It is the specific case of the assessee is that the CIT(A) has relied on the remand report of the TPO without appreciating that TPO in relation to ‘smoke meter’ and ‘heating channel’ looked only at A.E and third party invoice A.O for Financial Year 2010-11 and over looked the A.E and third party invoice for impugned Financial Year 2011-12 and did not refer to Invoice No. 3011101638 dated 03/11/2021 wherein the aforesaid asset were sold by AVL List GmPG to third party customer. Therefore, in our considered opinion, if the matter is remanded to the file of A.O to consider the A.E and third party invoice for the Financial Year 2011-12, Invoice and other details submitted by the assessee and decide the said issue afresh, the substantial justice would be rendered. Accordingly, we allow the Grounds of Appeal for statistical purpose with a direction to the A.O. for de-novo consideration for the issue by considering all the invoices and details submitted by the assessee in the right perspective and pass order in accordance with law. Appeal of the assessee is allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer pricing adjustment disallowing a 5% mark-up charged by the associated enterprise on sale of fixed assets (manufacturing cost plus mark-up) was correctly made by the Transfer Pricing Officer and upheld by the Commissioner (Appeals). 2. Whether specific invoices and documentary evidence for the impugned financial year (showing third-party prices for the same assets) were improperly overlooked by the TPO/CIT(A), and whether fresh consideration/remand to the Assessing Officer is required. 3. Whether closely linked transactions (import of fixed assets) could be segregated for benchmarking rather than being benchmarked together under TNMM (transactional net margin method) and whether the internal CUP method adopted by the CIT(A) for other assets ought to have been applied to these assets. 4. Ancillary: Whether the rectification application and deletion of staff welfare disallowance require further adjudication by the Tribunal (raised but not pursued substantively before the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of TP adjustment disallowing 5% mark-up on purchase of fixed assets Legal framework: Section 92CA (and related transfer pricing provisions) empowers reference to a TPO and adjustment of international transactions to arm's length price (ALP). Benchmarking methods include CUP and TNMM among recognized approaches; intra-group pricing must be tested against comparable uncontrolled transactions for the relevant period. Precedent treatment: No specific precedent was cited by the Tribunal; the decision analyzes facts and records of the TPO/CIT(A) without overruling or following a stated judicial authority. Interpretation and reasoning: The TPO had benchmarked the purchase of fixed assets separately and disallowed the 5% mark-up charged by the associated enterprise, treating ALP as manufacturing cost only. The CIT(A) accepted an internal CUP method for other assets but excluded two assets (smoke meter and heating channel) from the ALP determination based on the TPO's remand report. The assessee produced invoices showing the same assets sold to third parties in the impugned year at higher prices, and contended that such evidence supports the arm's length status of the prices charged to it (including the mark-up). Ratio vs. Obiter: Ratio - the Tribunal's core holding is that where relevant contemporaneous third-party invoices for the same financial year exist and were not considered by the TPO/CIT(A), the appropriate course is remand for fresh consideration rather than summarily sustaining the adjustment. Obiter - commentary that the internal CUP was accepted for other assets but not these two is explanatory of the record rather than a standalone legal principle. Conclusions: The Tribunal found that the TPO/CIT(A) overlooked invoices for the impugned financial year (invoice nos. evidencing third-party sales in the same year) and therefore directed de novo consideration by the Assessing Officer, allowing the appeal for statistical purposes and remanding the matter to consider all invoices and details in the right perspective and pass orders in accordance with law. Issue 2 - Admissibility and effect of additional invoices/evidence for the impugned year; propriety of remand Legal framework: Transfer pricing assessment requires contemporaneous documentation and correct benchmarking of comparable uncontrolled transactions; appellate authorities may remit matters to the AO for fresh adjudication where material evidence has not been properly considered. Precedent treatment: No precedent cited; Tribunal relied on principles of fair adjudication and requirement that material evidence for the relevant year be considered. Interpretation and reasoning: The Tribunal emphasized that the TPO's remand report and the CIT(A)'s order relied on comparables from an earlier financial year (2010-11) while overlooking invoices dated within the impugned year (2011-12) showing higher third-party prices for the same assets. Given the existence of such contemporaneous invoices placed before the CIT(A) as additional evidence, the Tribunal concluded that substantial justice required remand to the AO to verify and consider those invoices and related details afresh. Ratio vs. Obiter: Ratio - when material contemporaneous third-party invoices for the impugned year were placed on record but not considered by the TPO/CIT(A), remand for de novo consideration is appropriate. Obiter - the Tribunal's observation that the matter is remitted 'for statistical purpose' clarifies scope of its order but does not limit the AO's power to adjudicate on merits. Conclusions: The Tribunal directed remand to the AO for de novo consideration of the invoices and all relevant details submitted by the assessee for the impugned financial year, thereby setting aside the disallowance to that extent and allowing the appeal for statistical purposes. Issue 3 - Benchmarking methodology: segregation of fixed-asset import transactions vs. aggregation under TNMM (and application of internal CUP) Legal framework: Transfer pricing rules permit different benchmarking methods (CUP, TNMM, etc.); choice of method must reflect the most reliable means to determine ALP, based on the facts and comparability analysis. Transactions that are closely linked may be benchmarked together or separately depending on reliability and comparability of data. Precedent treatment: No authority was relied upon to dictate method selection; the Tribunal reviewed whether the record supported the TPO/CIT(A) segmentation and whether invoices supported an internal CUP comparison for the impugned assets. Interpretation and reasoning: The CIT(A) applied internal CUP for other assets but excluded the two contested assets relying on the TPO's remand report. The assessee argued that the same internal CUP approach should apply to the smoke meter and heating channel as contemporaneous third-party invoices exist. The Tribunal did not resolve which method is ultimately correct on the merits but found that the failure to consider the impugned-year invoices rendered the TPO/CIT(A) conclusion unsafe, warranting remand so that the AO may reassess the appropriate benchmarking approach (including possible application of internal CUP) after considering all relevant invoices. Ratio vs. Obiter: Ratio - methodological choice must be re-examined in light of all relevant contemporaneous evidence; if such evidence was overlooked, remand is required. Obiter - the Tribunal's acceptance of internal CUP for other assets is descriptive of the CIT(A)'s order and not a binding finding on the contested assets. Conclusions: The Tribunal ordered re-examination by the AO, implicitly recognizing that the question of appropriate benchmarking (segregation vs. aggregation; TNMM vs. CUP) must be decided after consideration of the impugned-year invoices and related facts. Issue 4 - Rectification application and staff welfare disallowance (ancillary matters) Legal framework: Rectification is permitted where there is an apparent error on the face of the record; tribunal review of consequential administrative steps depends on whether the authority acted within its powers and considered relevant material. Precedent treatment: Not addressed by the Tribunal; the CIT(A) had declined rectification on the ground that TPO findings were final and not an error apparent on record. The staff welfare disallowance was deleted by the CIT(A) and no further challenge to that deletion is recorded. Interpretation and reasoning: The Tribunal did not reopen the CIT(A)'s deletion of staff welfare disallowance and focused its order on the primary transfer pricing issue and evidentiary lacunae. The rectification plea's rejection by the CIT(A) was noted as part of the factual background but the Tribunal's remedy was remand to the AO rather than direct rectification by the Tribunal. Ratio vs. Obiter: Obiter - observations regarding rectification and staff welfare disallowance are incidental and do not form the basis of the Tribunal's operative direction. Conclusions: No further adjudication on rectification or staff welfare disallowance was undertaken by the Tribunal; the primary direction is remand for de novo consideration of the transfer pricing treatment after admission and evaluation of the impugned-year invoices. Disposition The Tribunal allowed the appeal for statistical purposes and remitted the matter to the Assessing Officer for de novo consideration of the purchase-of-fixed-assets issue, directing that all invoices and details submitted by the assessee (including contemporaneous third-party invoices for the impugned financial year) be considered in the right perspective and that an order be passed in accordance with law.