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2015 (8) TMI 922 - AT - Income TaxTransfer pricing adjustment - inclusion of cost of sales incurred by the AEs - Held that - It was not correct on the part of the TPO to include the cost of sales incurred by the AEs in respect of which the assessee company has rendered services and then to work out the profit for determination of the arm s length prices. Our view is also supported by the judgment of the Delhi Tribunal in the case of Sojitz India (P) Ltd. vs DCIT (2013 (6) TMI 550 - ITAT DELHI ) where a similar issue has come up. The adjustment as confirmed by the DRP is otherwise untenable in view of the proviso to section 92C of the Act. The TPO has included the cost of sales of the AEs while making adjustment to the arm s length price. The cost base as determined by the learned TPO in the assessment year 2007-08 is ₹ 4558,90,44,859. The adjustment proposed after order from the DRP is ₹ 116,70,79,548. This amount is within 5% of the cost base of ₹ 5589044859/- determined by the learned TPO himself. The cost base as determined by the TPO in the assessment year 2008-09 is ₹ 4071,95,89,546. The adjustment proposed after order from the DRP is ₹ 114,82,92,425. This amount is also within 5% of the cost base determined by the TPO himself. Accordingly, no adjustment could have been made in view of the proviso to section 92C of the Act. The TPO is not right in including the cost of sales while determining arm s length price and not considering the same while applying proviso to section 92C of the Act. According to provision of section 92C first arm s length price has to be determined. Thereafter the same has to be compared with the price charged by the assessee and if the difference between the price determined by TPO and the price charged by the assessee is within 5% then no adjustment is required to be made. - Decided in favour of assessee.
Issues Involved:
1. Addition made by the AO on account of the arm's length price determined by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP). Detailed Analysis: 1. Core Issue - Arm's Length Price Determination: The primary issue in these appeals pertains to the addition made by the AO based on the arm's length price determined by the TPO and upheld by the DRP. The assessee company, a wholly-owned subsidiary of Mitsui & Co. Ltd., Japan, provides support services to its group entities. The TPO disagreed with the assessee's use of the Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) as 'Berry Ratio' against operating expenses, leading to the inclusion of the cost of sales in the denominator of the PLI used. 2. TPO's Recharacterization of Transactions: The TPO recharacterized the support services provided by the assessee as equivalent to trading activities. The TPO included the cost of goods sold in the combined AE segment and applied a margin based on comparables, leading to a proposed adjustment. The DRP upheld this recharacterization but directed the exclusion of certain comparables, resulting in an increased adjustment. 3. Assessee's Contentions: The assessee argued that its primary business is providing sales support and coordination activities, not trading. It contended that the TPO's inclusion of the cost of goods sold in the cost base was incorrect and that the comparables selected by the TPO were inappropriate. The assessee maintained that the correct method for support services is the TNMM with OP/TC as the PLI. 4. Precedent Cases and Judicial Decisions: The assessee cited several judicial decisions, including the Delhi Tribunal's judgment in the case of Sojitz India (P) Ltd. vs. DCIT and the Hon'ble Delhi High Court's decision in Li & Fung India Pvt. Ltd. vs. CIT, which supported the assessee's contention that the TPO's recharacterization of transactions and inclusion of the cost of goods sold were incorrect. 5. Tribunal's Findings: The Tribunal found that the facts of the present case were similar to those in the Mitsubishi Corporation India (P) Ltd. case, where the ITAT held that it is impermissible to make notional additions in the cost base and include costs not borne by the assessee. The Tribunal also referred to the Hon'ble Delhi High Court's judgment in Li & Fung, which emphasized that the TNMM should be applied with reference to costs incurred by the assessee, not third parties. 6. Application of Proviso to Section 92C: The Tribunal noted that the adjustment made by the TPO was within the 5% range specified in the proviso to Section 92C of the Income Tax Act. Therefore, no adjustment was warranted. The Tribunal rejected the CIT(DR)'s contention that the proviso applies only when two different methods are used. Conclusion: The Tribunal concluded that the TPO's adjustment to the arm's length price was unsustainable. It directed the deletion of the adjustments made by the AO, thereby allowing the assessee's appeals. The Tribunal's decision was based on a detailed analysis of the facts, judicial precedents, and the correct application of the TNMM and the proviso to Section 92C.
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