DCIT Vs Brady Company India Private Limited (ITAT Bangalore)
Bangalore ITAT Reaffirms that Transfer Pricing Adjustment Must Be Restricted Only to International Transactions with AEs
The Bangalore ITAT dismissed the Revenue’s appeal and reiterated the settled legal position that transfer pricing adjustments under Chapter X can be made only in respect of international transactions with Associated Enterprises (AEs) and not on the assessee’s entire turnover or overall segmental transactions.
In the present case, the assessee was engaged in manufacturing, trading and shared services. The TPO had proposed a transfer pricing adjustment of ₹2.96 crore in the manufacturing segment by applying the TNMM. The CIT(A) directed that the adjustment should be restricted only to the value of international transactions with AEs and also directed verification of capacity utilisation adjustment, working capital adjustment, and consistent treatment of forex fluctuations and provisions written back as operating items. After giving effect to these directions, the TPO accepted the assessee’s computations, resulting in complete deletion of the TP adjustment.
Before the Tribunal, the Revenue argued that where AE purchases depress the overall profit margin of the manufacturing segment, restricting the adjustment only to AE transactions defeats the object of transfer pricing provisions. The Department even illustrated, through detailed numerical examples, that a proportionate adjustment would still leave the tested party’s margins below the arm’s length level and therefore the adjustment should effectively restore the overall segmental margin.
The Tribunal, however, held that although the Revenue’s arguments were logically appealing, the issue is no longer res integra. Relying on the Bombay High Court decisions in CIT v. Goldstar Jewellery Design (P.) Ltd. and CIT v. Alstom Projects India Ltd., it held that ALP adjustment can be made only in relation to international transactions with AEs and cannot be extended to uncontrolled domestic transactions. The Tribunal also noted that although the issue is pending before the Supreme Court in the Firestone International matter, the existing High Court precedents continue to bind the Tribunal.
The Tribunal further upheld the grant of capacity utilisation adjustment and working capital adjustment, observing that these had been verified and allowed by the TPO himself while giving effect to the CIT(A)’s directions. Likewise, it approved the direction to treat forex gains/losses and provisions written back consistently as operating items for transfer pricing purposes. Consequently, all grounds raised by the Revenue were dismissed and the assessee succeeded.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
