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

ITAT Visakhapatnam partly allowed the assessee's appeal regarding transfer pricing adjustments. The tribunal directed the AO/TPO to consider all DRP directions while drafting the final assessment order, particularly regarding working capital adjustments that were partially ignored. However, the tribunal rejected the assessee's request to change the transfer pricing method from TNMM to CUP, emphasizing consistency requirement when facts remain unchanged across assessment years. The tribunal also upheld DRP's rejection of objections regarding comparable selection, multiple year data usage, and extraordinary expenses, finding the assessee failed to substantiate claims with adequate evidence.

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Issues Involved:

1. Adjustment of Transfer Price for International Transactions
2. Compliance with Directions of Dispute Resolution Panel (DRP)
3. Selection of Most Appropriate Method for Transfer Pricing
4. Consideration of Multiple Year Data and Comparable Companies
5. Adjustment for Under-utilization of Capacity and Non-operating Expenses

Summary:

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.

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