Case Law Details
CIT v Firestone International Private Limited [TS-806-SC-2016]
Hon’ble Supreme Court admits the SLP- Transfer pricing adjustment should be restricted to AE transactions only and not on the entire turnover of the assessee.
Facts
1. The assessee was engaged in the business of export of diamond and also manufacturing of jewellery. The assesse has two units: Diamond Polishing and manufacturing of Jewellery. The unit manufacturing jewellery is claiming deduction u/s 10B of the Incoma Tax Act, 1961 (“The Act”). The assessee adopted the TNM method at entity level and considered its international transactions at arm’s length. During the transfer pricing assessments for AY 2006-07, Ld. TPO has made adjustment of an amount Rs 1.20 cr on the entire turnover of the aseesee.
2. Aggrieved, the assessee filed an appeal before the first applellate authority {“CIT (A)”}. On appeal, CIT (A) restricted the transfer pricing adjustment to the AE transaction only and thereby confirming the adjustment upto an amount of Rs. 8.39 Lakhs as against Rs. 1.20 cr. CIT (A) also reallocated some expenditure on the basis of sales ratio.
3. Aggrieved with the order of CIT (A), the assessee filed an appeal before Income Tax Appellate Tribunal (“ITAT”). ITAT held that since the arms length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee and also held that since the assessee fairly falls within the safe harbour range, hence no adjustment was required. ITAT also confirmed the order of CIT (A) for reallocation of expenditures.
4. Aggrieved, Revenue preferred an appeal before the High Court (HC”) on the following Substantial Questions of Law:
a. “Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in restricting the adjustment only on international transactions where the assessee has selected TNMM and applied the same on entity level because presumption underlying arms length principle is that uncontrolled transactions are at arm’s length, and therefore, it the overall margins are less than arms length margins, the short fall must be on account of AE transactions only and not on pro rata basis.
b. Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in deleting the addition of Rs.8,39,245/ as the adjustment is with +/ 5% as the ITAT has restricted the adjustment only on AE transactions which has resulted the adjustment within +/ 5%?”
5. The HC observed that Question (a) is academic and did not arise from the order of ITAT and therefore, held that there was no reason to entertain this question as substantial question of law. In regard to Question (b), the HC held that the decision of the ITAT was factual determination of the ALP and the same was found within the (+,-) 5% safe harbour range and held that the ITAT decision was not perverse and arbitrary, therefore, reject this question of law.
6. Aggrieved, Revenue filed an SLP before the Hon’ble Supreme Court.
Judgement:
7. Hon’ble Supereme court granted the SLP filed by Revenue against the order passed by Hon’ble High Court.F
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