Analysis of ITAT Mumbai Judgment - Transfer Pricing Adjustment Dispute: Period of limitation u/s 144C

Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2024 (1) TMI 493 - ITAT MUMBAI

Introduction:

In the ever-evolving landscape of international taxation, disputes often arise between taxpayers and tax authorities regarding the pricing of transactions between related entities. These disputes play a critical role in determining the taxable income of multinational corporations. In this article, we will analyze a recent judgment by the Income Tax Appellate Tribunal (ITAT) Mumbai, which addresses various issues related to transfer pricing adjustments.

Background:

The case heard by the ITAT Mumbai involves an appellant, a corporate entity engaged in providing marketing support services to its associated enterprises. The assessment under dispute was framed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(3) and Section 144B of the Income Tax Act, 1961, for the assessment year 2018–19, dated August 1, 2022. The appellant had declared a loss of ₹102,714,898/- in its return filed on November 29, 2018, which was assessed at ₹189,01,260/- after making a transfer pricing adjustment under Section 92CA of ₹121,616,158/-.

Key Issues Addressed in the Judgment:

The judgment addresses several key issues raised by the appellant. Let's examine each issue in detail:

1. Barred by Limitation:

   The primary issue raised by the appellant is that the assessment order passed on August 1, 2022, is barred by limitation. The appellant argued that as per Section 144C(13) of the Income Tax Act, the order should have been passed within one month from the end of the month in which the directions from the Learned Dispute Resolution Panel (DRP) were received. The directions from the DRP were issued on June 14, 2022, and the appellant contends that the order should have been passed by July 31, 2022. However, the order was passed on August 1, 2022, and digitally signed on August 2, 2022.

   The ITAT Mumbai upheld the appellant's argument, noting that the order passed on August 1, 2022, was indeed beyond the time limit prescribed by Section 144C(13). Therefore, the assessment order was deemed barred by limitation and was quashed.

2. Transfer Pricing Adjustment - Margin Computation:

   While the primary issue was related to limitation, the appellant had also raised concerns regarding the transfer pricing adjustment. The appellant had initially computed its profit level indicator (PLI) as 10.79% by adopting the operating profit/operating cost method. They benchmarked the international transaction by selecting 17 comparable companies with margins ranging from 2.80% to 10.84%. The appellant argued that its margin fell within the range of the margins of comparable companies, justifying the arm's-length pricing.

   However, the Transfer Pricing Officer (TPO) examined the comparability study and raised questions about the exclusion of three comparable companies and the inclusion of non-functionally comparable companies in the study. The TPO determined a three-year weighted unadjusted average operating profit/total cost PLI of 30.73% for the retained comparables, leading to a transfer pricing adjustment of ₹121,616,158.

   The ITAT Mumbai did not delve into the merits of the transfer pricing adjustment due to the primary issue of limitation. Therefore, the specific transfer pricing issues were not addressed in this judgment.

Conclusion:

The ITAT Mumbai judgment of January 9, 2024, primarily revolves around the issue of limitation in passing the assessment order. The tribunal ruled that the order passed on August 1, 2022, was indeed barred by limitation and quashed it accordingly.

While the judgment did not provide a detailed analysis of the transfer pricing adjustment issues, it serves as a reminder of the importance of adhering to statutory timelines in the assessment process. Furthermore, it highlights the need for taxpayers and tax authorities to meticulously follow legal procedures in tax disputes to ensure a fair and timely resolution.

It is worth noting that transfer pricing disputes are complex and often involve a thorough examination of financial data and comparability analysis. Taxpayers and tax professionals should continue to stay vigilant and well-prepared in addressing transfer pricing challenges in international transactions.

Full Text:

2024 (1) TMI 493 - ITAT MUMBAI