Issue Before 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.)?
Facts of the Case
(a) The Respondent is in the business of execution of turnkey contracts involving design, manufacture, supply, erection and commissioning of sugar plants, cement plants, etc. 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.
(b) The TPO on selection of com parables arrived at the margin at 6.29% as against 5.19% arrived at by the Respondent Assesse in its Form 3CEB. However, the TPO proposed to make adjustment on account of enhancement of profit margin on all transactions of the Respondent Assessee. This in spite of the Respondent Assessee’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. The Assessing Officer passed an order in accordance with the above order of the TPO.
(c) Being aggrieved, the assessee carried the above issue in Appeal to the Tribunal. 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.
(d) The grievance of the Revenue before us is that the adjustment is not to be restricted only in respect of transactions entered into with the AE. All the transactions of the Respondent Assessee would have necessarily be varied/ adjusted by the margin arrived at by the TPO to arrive at the ALP.
(e) We find that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. 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 non AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.
A similar view has been taken by this Court in Income Tax Appeal No. 1814 of 2013 (CIT v/s. M/s. Tara Jewels Exports Pvt. Ltd.) decided on 5th October, 2015 as well as by the Delhi High Court in CIT v/s. Keilin Panalfa Ltd. (ITA No. 11/2015) decided on 9th September, 2015.
In the above view, as the provisions of the Act in respect of transfer pricing are self evident, Question proposed does not give rise to any substantial question of law. Thus, not entertained.