The Chennai bench of the Income Tax Appellate Tribunal held that the issue is no longer res integra in view of the decision of the Hon’ble Karnataka High Court in the case of PCIT vs. Texport Overseas Pvt. Ltd., wherein it was held that clause (i) of section 92BA having been omitted by the Finance Act, 2017.
The assessee is one of India’s most quality conscious and progressive footwear companies. The product range of the company include Hawaii, canvas, dip, Bahamas, leatherite, joggers and flite. The return of income for the AY 2016-17 was filed by the assessee company on 29.11.2016 declaring total income at Rs.160,16,70,610/-.
The TPO sought to examine the specified domestic transaction on account of transfer of semi-finished goods from non-eligible units to unit where deduction under section 80IC of the Act is claimed by the assessee. The TPO issued notice to the assessee requiring the assessee to provide details relating to the said transaction together with the basis of computing the transaction price thereon. The assessee filed replies vide letter dated 10.07.2019 and 12.09.2019 along with documentary evidences.
The assessee submitted that it transferred semi finished goods from non-eligible units where shoes and sandals were manufactured to eligible units, i.e., Unit-V, Haridwar where also shoes and sandals in the name of Sparx was manufactured. It is not in dispute that Unit-V, Haridwar is eligible for deduction under section 80IC of the Act. It was explained that the price at which the semi-finished goods were transferred was determined on the basis of Cost Plus methodology by adding of margin of 15% on the cost of goods transferred. It was further explained that the transfer cost by adding a margin of 15% is more than the profit margin of the assessee company as a whole which is 10.35% as well as the profit margin of UnitV for which deduction under section 80IC of the Income Tax Act was claimed. The complete details of semi-finished goods transferred from non-eligible unit to eligible unit were duly furnished by the assessee.
The TPO rejected the Cost Plus method adopted by the assessee as the Most Appropriate Method (MAM) and substituted the same with Transactional Net Margin Method (TNMM). The TPO identified six comparables by adopting the Profit Level Indicator (PLI) as Operating Profit/Operating Cost (OP/OC) and arrived at the average margin of the comparables at 12.99%. This was compared with the assessee’s margin of 15% and arm’s length price adjustment was made to the tune of Rs.87,99,670/- by the TPO.
After hearing both the parties, the tribunal observed that it would be pertinent to address the preliminary issue as to whether any transfer pricing adjustment per se can be made in respect of specified domestic transactions under section 92BA of the Act in view of the fact that section 92BA(i) has been omitted from the statute by the Finance Act, 2017.
The tribunal held that the issue is no longer res integra in view of the decision of the Hon’ble Karnataka High Court in the case of PCIT vs. Texport Overseas Pvt. Ltd., wherein it was held that clause (i) of section 92BA having been omitted by the Finance Act, 2017 w.e.f. 01.04.2017 from the statute, the resultant effect would be that it had never been passed and, hence, the decision taken by the AO under the effect of section 92BA of the Act and reference made to the TPO under section 92CA of the Act was invalid and bad in law.
The two member bench consisting of Anubhav Sharma (Judicial member) and M.Balaganesh (Accountant member) held that they have no hesitation in holding that the transfer pricing adjustment made in the sum of Rs.91,04,673/- and the further addition of Rs.27,31,402/-, which is in consequence of the same, could not be made, in the facts and circumstances of the instant case. Thus the addition was deleted and the appeal was allowed.
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