Transfer Pricing adjustment has to be confined to transactions with Associated Enterprises only

CA Suraj R. Agrawal

Facts of the case:

1. The Respondent is in the business of execution of turnkey contracts involving design, manufacture, supply, erection and commissioning of sugar plants, cement plants, etc.
2. During the subject Assessment Year, the Respondent Assessee had International Transaction with its Associated Enterprises (AE) in respect of import of spares and equipments, royalty and project engineering, manufacturing drawings, settlement for liquidated damages and interest on delayed payments.
3. The TPO on selection of comparables arrived at the margin at 6.29% as against 5.19% arrived at by the Respondent Assesse in its Form 3CEB.
4. However, the TPO proposed to make adjustment on account of enhancement of profit margin on all transactions of the RespondentAssessee.
5. This in spite of the RespondentAssessee’s objection to the application of the margin applicable to arrive at ALP at 6.29% on transactions with third party i.e. non AE transactions.
6. The Tribunal by the impugned order held that only transactions entered into by an assessee with its AE are subject to transfer pricing adjustment and not otherwise. Thus, allowing the Assessee’s appeal before it.

Issue put before Bombay High Court:

Whether on the facts and the circumstance of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)?

Ruling of Honorable Bombay High Court:

1. In terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP.
2. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties.
3. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with nonAE. This adjustment is beyond the scope and ambit of Chapter X of the Act.

Key Take Away

An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties.