Transfer Pricing adjustment should be restricted to AE transactions: ITAT

Tokai Rika Minda India Private Limited Vs DCIT (ITAT Bangalore)

On the issue of Transfer Pricing (TP) adjustment to be restricted to AE transactions, we find that the Assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The ITAT in the case of Continental Automotive Components India Private Limited IT(TP)A No713/Bang/2017 has held as follows:

“53. We have considered the rival submissions. This issue was considered by the Hon’ble Supreme Court in the case of CITv. Hindustan Unilever Ltd., 99 taxman.com 134 (SC) wherein it was held that while determining the ALP of international transactions, benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. In view of this, we-find force in the argument of the ld. AR that the TP adjustment should be restricted only to international transactions pertaining to purchase of raw materials from AEs and other related transactions only. With these observations, we allow this ground of the assessee.”

In view of the transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against final assessment order passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act.

2. Though the assessee has raised multifarious grounds in its memorandum of appeal, during the hearing, the learned AR confined his submissions to the following issues:-

(i) Violation of principles of natural justice (Grounds 1.1 to 1.7)

(ii) Search process and selection of comparables (Ground 1.7 to 3)

(iii) Adjustment towards Forex fluctuations (Grounds 4 to 5.1)

(iv) Exclusion of depreciation from operating cost (Ground 6)

(v) Adjustment towards capacity utilisation (Grounds 7)

(vi) Adjustment towards working capital adjustment (Grounds 8)

(vii) Restricting adjustment towards AE transactions (Ground 9)

[This addition was unilaterally added by the DRP]

3. Brief facts of the case are as follows:

The assessee is a subsidiary of the Tokai Rika Company Ltd, based in Japan. The assessee is mainly engaged in manufacturing key sets and locks to automotive industry. The assessee has manufacturing facility. The assessee in its TP study, has adopted TNMM as the most appropriate method. The assessee has arrived at set of 2 comparable companies with an average OPM of 2.80% viz-a-viz that of 23.11 % of the assessee. The assessee made various adjustments to arrive at the OPM. Thus, in the TP study, it was concluded that international transactions are at arm’s length.

4. The TPO rejected the comparables set taken by the assessee. The TPO conducted a fresh TP analysis and selected a set of 6 comparable companies and arrived at OPM of comparables at 4.37%. After rejecting the adjustments made by the assessee, the TPO arrived at OPM of the assessee at – 10.82%. The TPO therefore proposed a TP adjustment of Rs. 4,69,48,996.

5. Aggrieved by the above TP adjustment, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee. In fact the DRP enhanced the TP adjustment to Rs. 12,96,10,400 by directing the TPO to recompute the TP adjustment without giving the benefit of proportionate adjustment on account of local purchases. Pursuant to the DRP’s directions, the final assessment order was passed.

6. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. The assessee has filed a paper book enclosing therein the TP study, the financials etc. The learned AR has filed a brief written submission. The contentions raised are summarized as follows:-

• The assessee has submitted that the TPO has done fresh TP analysis but did not furnish the search process and the accept/reject matrix, while selecting fresh set of comparables. The assessee has also .submitted that the DRP has not considered the detailed submissions made by the assessee on various issues.
• The assessee submitted that the TPO has erred in applying filter of import purchase to total purchase of 25%. The assessee is also seeking inclusion of Dynamatic technologies and Jay Ushin limited.
• The Assessee has submitted that due to adverse foreign exchange fluctuations, import cost of raw materials have increased considerably. The Assessee has therefore claimed economic adjustment towards Forex fluctuations.

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