2022 (11) TMI 1552 - AT - Income Tax

TP Adjustment - difference in the arm s length price ( ALP ) of its international related party transactions - In lieu of the services availed by the assessee from its overseas AEs towards inspection of goods supervision of commissioning installation and erection of cement plant etc. the AE charges were fixed on cost plus certain markup of 4% basis - AO while making the assessment has disallowed the markup component while accepting the cost incurred by the AE - HELD THAT - In the light of the submissions made on behalf of the assessee the issue is no longer res integra. The issue has been either endorsed by the Revenue itself or has been ruled in favour of the assessee by the Co-ordinate Bench in assessee s own case in Assessment Years 2014-15 2016-17 and 2017-18. A reference is made in this regard to the decision of the Co-ordinate Bench 2022 (4) TMI 1506 - ITAT DELHI and 2021 (11) TMI 967 - ITAT DELHI - Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this appeal pertain to the validity and correctness of the Transfer Pricing adjustment made by the Revenue authorities under Section 92CA(4) of the Income Tax Act for the Assessment Year 2018-19. Specifically, the issues are:

- Whether the adjustment of Rs. 76,64,791 to the total income of the appellant on account of alleged difference in the arm's length price (ALP) of international related party transactions was justified.

- Whether the Revenue erred in not appreciating the consistency principle, given that similar pricing and mark-up arrangements for the same services were accepted in earlier Assessment Years (AYs) 2014-15, 2016-17, and 2017-18, including by the ITAT.

- Whether the Dispute Resolution Panel (DRP) issued subjective directions lacking valid and sufficient reasoning, violating the provisions of Section 144C(8) of the Act.

- Whether the Revenue violated Section 144C(10) of the Act by sustaining the adjustment despite no appeal being preferred before the High Court against earlier ITAT orders.

- Whether the Revenue erred in disallowing the mark-up portion charged by the Associated Enterprises (AEs) without cogent reasons, ignoring economic and commercial realities and comprehensive benchmarking analyses.

- Whether the Revenue failed to allow the benefit of the +/- 3% range as provided in the proviso to Section 92C(2) of the Act while determining ALP.

- Whether the Revenue incorrectly considered the mark-up amount as Rs. 76,64,791 instead of the actual mark-up of Rs. 30,99,427 paid by the appellant, disregarding documentary evidence.

- Whether the DRP passed a cryptic order without considering information furnished or addressing contentions raised.

- Whether the Assessing Officer (AO) erred in levying interest under Section 234B and initiating penalty proceedings under Section 270A of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Transfer Pricing Adjustment under Section 92CA(4)

Legal Framework and Precedents: Section 92CA(4) empowers the Transfer Pricing Officer (TPO) to make adjustments to the income of an assessee if the international transactions are not at arm's length price. The principle of arm's length price is central to transfer pricing regulations, ensuring that transactions between related parties are priced as if they were between independent entities.

Court's Interpretation and Reasoning: The Tribunal noted that the adjustment of Rs. 76,64,791 was made by the Revenue authorities on account of alleged difference in ALP. However, it was highlighted that the same pricing structure and mark-up had been accepted in prior Assessment Years by the Revenue and the ITAT. The Tribunal observed that the issue is no longer res integra and has been consistently ruled in favor of the appellant in AYs 2014-15, 2016-17, and 2017-18.

Key Evidence and Findings: The appellant submitted a tabular statement showing acceptance of the cost plus 4% mark-up pricing by the TPO, DRP, and ITAT in earlier years. The Revenue failed to rebut these factual submissions.

Application of Law to Facts: Given the consistent acceptance of the pricing methodology and mark-up in earlier years, and absence of any change in facts or circumstances for AY 2018-19, the Tribunal found no justification for the adjustment.

Treatment of Competing Arguments: The Revenue's argument for adjustment was rejected due to lack of new evidence or change in circumstances. The Tribunal relied on the principle of consistency and prior judicial pronouncements.

Conclusion: The adjustment under Section 92CA(4) was unwarranted and was set aside in favor of the appellant.

Issue 2: Principle of Consistency and Binding Effect of Earlier ITAT Orders

Legal Framework and Precedents: The principle of consistency is well-established in tax jurisprudence, requiring Revenue authorities to follow their own earlier decisions unless there is a change in facts or law. The Supreme Court has emphasized this principle to ensure fairness and predictability.

Court's Interpretation and Reasoning: The Tribunal emphasized that the Revenue itself had accepted the mark-up and pricing in earlier years, including ITAT rulings in the appellant's own case. There was no appeal filed by the Revenue against those ITAT orders before the High Court, making those decisions binding under Section 144C(10).

Key Evidence and Findings: Reference was made to specific ITAT orders for AYs 2014-15 and 2017-18 where the pricing was accepted. The Revenue did not challenge these orders further.

Application of Law to Facts: The Tribunal held that the Revenue erred in ignoring the principle of consistency and continuing with the adjustment without any fresh grounds.

Treatment of Competing Arguments: The Revenue's failure to appeal earlier orders was a critical factor. The Tribunal rejected the subjective directions of the DRP that lacked sufficient reasoning.

Conclusion: The principle of consistency mandated acceptance of the appellant's pricing and mark-up for AY 2018-19.

Issue 3: Disallowance of Mark-up Portion Charged by Associated Enterprises

Legal Framework and Precedents: Transfer pricing regulations require that mark-ups reflect economic and commercial realities and are supported by benchmarking analyses. The arm's length principle allows for a reasonable profit margin over cost for services rendered by AEs.

Court's Interpretation and Reasoning: The Tribunal noted that the Revenue disregarded the appellant's comprehensive benchmarking analysis and internal Comparable Uncontrolled Price (CUP) analysis without demonstrating any inadequacy or infirmity. It also noted contradictory treatment by the Revenue in accepting similarly priced services provided by the appellant to its AEs while disallowing mark-up on services availed.

Key Evidence and Findings: The appellant furnished detailed benchmarking reports and CUP analyses corroborating the mark-up charged. The Revenue failed to provide cogent reasons for disallowance.

Application of Law to Facts: The Tribunal applied the arm's length principle and found that no independent third party would provide such services without a reasonable profit margin, consistent with the 4% mark-up accepted previously.

Treatment of Competing Arguments: The Revenue's disallowance was found to be arbitrary and not supported by evidence or reasoning.

Conclusion: The mark-up portion charged by the AEs was justified and should not have been disallowed.

Issue 4: Allowance of +/- 3% Range under Proviso to Section 92C(2)

Legal Framework and Precedents: The proviso to Section 92C(2) allows for a margin of +/- 3% deviation in determining ALP to account for minor variances in pricing.

Court's Interpretation and Reasoning: The Tribunal observed that the Revenue erred in not allowing this statutory tolerance range while determining ALP.

Key Evidence and Findings: The appellant contended that the mark-up charged fell within the allowable range, but the Revenue disregarded this benefit.

Application of Law to Facts: The Tribunal held that the benefit of the +/- 3% range is mandatory and should have been allowed.

Treatment of Competing Arguments: The Revenue did not provide sufficient justification for denying this benefit.

Conclusion: The appellant was entitled to the benefit of the +/- 3% range under Section 92C(2).

Issue 5: Correctness of Mark-up Amount Considered by Revenue

Legal Framework and Precedents: The mark-up amount must be accurately computed based on documentary evidence and accepted pricing methodologies.

Court's Interpretation and Reasoning: The Tribunal found that the Revenue incorrectly considered the mark-up amount as Rs. 76,64,791 instead of Rs. 30,99,427 as substantiated by the appellant's documentary evidence.

Key Evidence and Findings: The appellant submitted detailed calculations and supporting documents establishing the correct mark-up amount.

Application of Law to Facts: The Tribunal emphasized the need to rely on correct and verified evidence rather than arbitrary figures.

Treatment of Competing Arguments: The Revenue's disregard for documentary evidence was not justified.

Conclusion: The correct mark-up amount was Rs. 30,99,427, not Rs. 76,64,791.

Issue 6: Cryptic Order Passed by DRP

Legal Framework and Precedents: Orders passed by the DRP must be reasoned and address the contentions raised by the assessee as per Section 144C(8).

Court's Interpretation and Reasoning: The Tribunal noted that the DRP passed a cryptic order without considering the information furnished or addressing the appellant's contentions.

Key Evidence and Findings: The appellant pointed to the lack of reasoning and failure to deal with key submissions.

Application of Law to Facts: The Tribunal found this to be a procedural lapse affecting the fairness of the proceedings.

Treatment of Competing Arguments: The Revenue did not justify the cryptic nature of the order.

Conclusion: The DRP order was deficient in reasoning and thus not sustainable.

Issue 7: Levy of Interest under Section 234B

Legal Framework and Precedents: Interest under Section 234B is leviable for default in payment of advance tax.

Court's Interpretation and Reasoning: The Tribunal observed that since the primary adjustment itself was not justified, the levy of interest under Section 234B was erroneous.

Key Evidence and Findings: No separate factual basis was found to sustain the interest levy.

Application of Law to Facts: Interest cannot be levied on an erroneous tax demand.

Treatment of Competing Arguments: The Revenue failed to establish grounds for interest levy.

Conclusion: Interest under Section 234B was wrongly levied and set aside.

Issue 8: Initiation of Penalty Proceedings under Section