The Kolkata Bench of Income Tax Appellate Tribunal (ITAT) deleted the transfer pricing adjustment after Transfer Pricing Officer (TPO)’s rejection of CUP analysis despite Dispute Resolution Panel (DRP) directions.
TDK India Pvt. Ltd.,appellant-assessee, sold goods to distributors at third-party prices, who then sold them to other customers. The assessee invoiced the distributors based on their customer prices and received full payment. In return, the assessee paid the distributors a sales margin based on their turnover.
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During the TPO proceedings, the TPO rejected the assessee’s pricing method and treated the sales margin payment as a royalty. The assessee showed that goods sold to AEs were priced the same or higher than those sold to unrelated parties. However, the TPO ignored this and used the CUP method, selecting a non-comparable company paying royalty.
The TPO proposed a transfer pricing adjustment of Rs. 24,81,50,256/- without sharing the benchmarking details. As a result, the AO made the addition in the assessment.
The DRP directed the deletion of the adjustment for the sales margin payment after reviewing the CUP analysis submitted by the appellant-assessee. The DRP instructed the TPO/AO to verify the details and compute the arm’s length margin based on previous years’ directions. Similar instructions were given for AY 2017-18.
However, the TPO ignored the DRP’s directions, wrongly claiming that the appellant had not submitted the CUP analysis, despite it being submitted on 25.02.2021. The TPO rejected the analysis as incomplete, saying it was based on a small sample and only covered EPCOS SRO, not other entities. The TPO also stated that CUP analysis should cover all transactions. As a result, the adjustment for the export of ferrite and sales margin payment was upheld.
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The assessee’s counsel stated that the DRP directed the TPO to verify and determine the ALP, but the TPO ignored this and upheld the adjustment. The counsel pointed out that the TPO accepted the same CUP analysis in AY 2017-18 but rejected it in AY 2016-17, showing inconsistency.
It was also noted that in most years, the approach was accepted or the adjustment was deleted based on the DRP’s direction. The counsel requested the deletion of the adjustment for AY 2016-17, as it was made without following the DRP’s binding direction.
The revenue counsel relied on the TPO/AO’s order.
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The two member bench comprising Pradip Kumar Choubey (Judicial Member) and Rajesh Kumar (Accountant Member) found that the DRP had directed the TPO to verify the data and determine the Arms Length Price(ALP), but the TPO ignored this and upheld the adjustment, claiming the CUP analysis was based on a sample. However, the same approach was accepted in AY 2017-18.
The tribunal noted that in other years, the TPO had accepted the assessee’s CUP analysis on a sample basis. Following the principle of consistency set by the Apex Court in Radhasoami Satsang, the ITAT held that the TPO could not take a different approach in AY 2016-17. It directed the AO to delete the adjustment.
In short, the appeal is allowed.
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