2024 (2) TMI 749 - AT - Income Tax

Tribunal partly allows transfer pricing appeal, directs compliance with DRP directions on working capital adjustments

Teejay India Private Limited Versus Assistant Commissioner of Income Tax, Circle-5 (1), Visakhapatnam

ITAT Visakhapatnam partly allowed the assessee's appeal regarding transfer pricing adjustments. The tribunal directed the AO/TPO to consider all DRP ... Transfer Pricing Adjustments - Validity of final assessment order u/s. 143(3) r.w.s 144C(13) passed not in conformity with the directions issued by the Ld. DRP - Request for change in the Transfer Pricing Method (TPM) from Transactional Net Margin Method (TNMM) to Comparable Uncontrolled Price (CUP) method - HELD THAT:- We find from the directions of the Ld. DRP wherein the objections raised by the assessee with respect to providing appropriate adjustment towards difference on account of working capital, the Ld. DRP has directed the Ld. AO to compute the mean of the working capital adjustment in respect of the comparables retained. AO in his order while considering the other directions of the Ld. DRP has erred in not considering the directions of the DRP with regard to working capital adjustment. We find that the Ld. AO has partly carried out the directions and partly ignored the directions with regard to working capital adjustment. We are therefore of the considered view that it would be deemed fit to direct the Ld. AO/ Ld.TPO to consider all the directions of the Ld. DRP while drafting the final assessment order. Accordingly, this legal ground raised by the assessee is partly allowed for statistical purposes. Selection of MAM [ Most appropriate method] - changing the method from TNMM to CUP which was rejected by the Ld. DRP - HELD THAT:- The principle of Res Judicata is not applicable to tax proceedings but at the same time, when there is no change in the facts, then it is the requirement of law that consistency should be maintained and the method will be adopted by the assessee for benchmarking its international transaction should not be disturbed. The assessee has adopted the TNMM during the earlier and subsequent assessment years as Most Appropriate Method. In the absence of any reasoning brought on record, there is no merit in deviating or taking a stand contrary to the accepted method in both the preceding and succeeding years. We therefore find merit in the arguments of the Ld. DR and in the present case, since there is no change in the facts and circumstances which merits deviating from the TNMM to CUP method to benchmark its international transactions.Thus the change in method from TNMM to CUP method cannot be entertained and thereby dismissed the grounds raised by the assessee. Comparable selection - AR submitted that the objections raised before the Ld. DRP were not considered and rejected by the Ld. DRP - HELD THAT:- DRP has observed and rejected the objections raised by the assessee with respect to multiple / prior year data and comparable companies while determining the ALP in relation to the assessee that the assessee has failed to establish that the use of data of earlier FYs could result in more reliable results. DRP also relied on various judicial pronouncements and Rule-10B(iv) of the IT Rules, 1962. The assessee also failed to produce any data to establish its objections raised before the Ld. DRP, even before us. DRP also rejected the objections of the assessee with regard to peculiar economic conditions faced by the assessee by observing that any such differences are taken care of while computing the mean margin - with regard to abnormal business loss and under-utilization of the capacity by the assessee company, the assessee has failed to demonstrate such factors which are unique to the assessee-company and does not exist in the case of comparable companies. We find that the assessee has also failed to produce or demonstrate such factors even before us. With regard to non-operating and extraordinary expenses, the Ld. DRP has observed that these cannot be considered as operating expenses as it is only a provision made in the books of account. We also find that the assessee has failed to establish that the above expenses are extraordinary in nature and these are not incurred by the comparable companies which necessitate appropriate adjustment. We are therefore inclined to uphold the directions of the Ld. DRP on the above issues thereby rejecting the grounds raised by the assessee. Issues Involved:1. Adjustment of Transfer Price for International Transactions2. Compliance with Directions of Dispute Resolution Panel (DRP)3. Selection of Most Appropriate Method for Transfer Pricing4. Consideration of Multiple Year Data and Comparable Companies5. Adjustment for Under-utilization of Capacity and Non-operating ExpensesSummary:1. Adjustment of Transfer Price for International Transactions:The assessee, engaged in manufacturing and exporting knitted fabrics, filed a return for AY 2012-13 declaring a loss. The AO, during scrutiny, found international transactions with Associated Enterprises (AEs) exceeding prescribed limits, leading to a reference to the Transfer Pricing Officer (TPO). The TPO made an upward adjustment of Rs. 12,88,76,471/- based on Arm's Length Price (ALP) calculations. The assessee objected to the TPO's decision before the Dispute Resolution Panel (DRP), which partly rejected the objections and directed the AO to compute the Arithmetic Mean as per DRP's directions. The final assessment order confirmed the adjustment, leading to the assessee's appeal.2. Compliance with Directions of Dispute Resolution Panel (DRP):The assessee raised a legal ground stating that the AO did not comply with the DRP's directions regarding working capital adjustment. The Tribunal found that the AO partly ignored the DRP's directions and directed the AO/TPO to consider all DRP directions while drafting the final assessment order. This ground was partly allowed for statistical purposes.3. Selection of Most Appropriate Method for Transfer Pricing:The assessee requested changing the method from Transactional Net Margin Method (TNMM) to Comparable Uncontrolled Price (CUP) method, citing acceptance in the previous year. The Tribunal noted that the principle of consistency should be maintained in the absence of any change in facts. Since the assessee adopted TNMM in earlier and subsequent years, the Tribunal dismissed the ground for changing the method to CUP.4. Consideration of Multiple Year Data and Comparable Companies:The assessee's objections regarding the use of multiple year/prior year data and comparable companies were rejected by the DRP and upheld by the Tribunal. The Tribunal found that the assessee failed to establish that using earlier FY data would result in more reliable results and did not demonstrate unique factors affecting the assessee that were not present in comparable companies.5. Adjustment for Under-utilization of Capacity and Non-operating Expenses:The DRP and Tribunal rejected the assessee's objections regarding adjustments for under-utilization of capacity and non-operating expenses. The assessee failed to demonstrate that these factors were unique and not present in comparable companies. The Tribunal upheld the DRP's directions, finding no merit in the assessee's claims.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, with specific directions to the AO/TPO to comply with the DRP's directions regarding working capital adjustment. Other grounds raised by the assessee were dismissed.