DRP Failed to Adjudicate All Operating Expenses for Margin Calculation: ITAT Sets Aside TP Adjustment on Sale of Traded Goods for Recomputation [Read Order]
The Tribunal found that the Dispute Resolution Panel (DRP) had failed by addressing only bank charges and not dealing with other components like treasury expenses and interest expense on working capital loans in determining the operating profit margin.
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) set aside the Transfer Pricing (TP) adjustment related to the sale of traded goods (rice) back to the Dispute Resolution Panel (DRP) for recomputation and held that the DRP's directions to be incomplete regarding the crucial issue of which expenses should be considered 'operating' for margin calculation.
PCL Foods Private Limited (assessee), engaged in the business of rice trading, entered into international transactions with its Associated Enterprises (AEs) for the sale of trade goods, benchmarking the transaction using the Transactional Net Margin Method (TNMM).
The Transfer Pricing Officer (TPO) initially proposed a significant adjustment of ₹18,70,34,202. Aggrieved, the assessee filed objections before the DRP, which resulted in a revised adjustment of ₹11,52,09,793. Aggrieved by the DRP’s directions, the assessee filed an appeal before the ITAT.
The assessee argued that the TPO erred by treating the entire finance cost including bank charges, treasury expenses, and interest expense on working capital loans as non-operating items while calculating the profit level indicators (PLIs) of the comparable companies.
The assessee contended that these expenses were integral to the normal operating cycle of a trading business and should be treated as operating in nature.
The two-member bench comprising Madhumita Roy (Judicial Member) and Brajesh Kumar Singh (Accountant Member), noted that the DRP, in its directions which had merely observed that bank charges were related to the business transactions of the assessee and therefore should be treated as operating.
The tribunal observed that this approach rendered the DRP's order "non-speaking and incomplete." The Tribunal observed that the DRP, as a quasi-judicial authority, was required under Section 144C(5) and (8) of the Income Tax Act to issue directions on all objections raised by the assessee.
The tribunal observed that the failure to deal with and record a finding on the other elements, such as treasury expenses and interest on working capital loans, amounted to a violation of the principles of natural justice.
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The Tribunal set aside the matter back to the file of the DRP by observing that these issues required detailed factual verification from the audited financial statements of the comparable entities.
The tribunal directed the DRP was directed to re-verify the computation of operating margins for all seven final comparables, deal with all the assessee's objections, and recompute the arm's length margin.
The tribunal remitted the core TP adjustment issue to the DRP for a fresh, complete adjudication. The appeal of the assessee was partly allowed for statistical purposes.
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