TP Adjustment on International Transactions Cannot be Applied on Entire Turnover: ITAT Restricts Adjustment to AE Transactions [Read Order]

The Income Tax Appellate Tribunal (ITAT) Bangalore Bench has held that Transfer Pricing (TP) adjustments must be confined only to international transactions with Associated Enterprises (AE) and cannot be extended to the assessee's entire turnover.

The Tribunal consequently upheld the deletion of a ₹2.95 crore adjustment made by the Assessing Officer (AO).

The assessee Brady Company India Pvt. Ltd., which is a manufacturer and trader has filed its tax return by showing zero income as per the claim of deductions made under Section 10A. In the course of assessment this issue was referred to the Transfer Pricing Officer (TPO).

As per the finding of Transfer Pricing Officer (TPO) a TP adjustment of ₹2.95 crore was required in the manufacturing division on account of Transactional Net Margin Method (TNMM). The TPO calculated margin of the assessee as (-2.32%) compared to comparable margin of 6.40% and made upward adjustment taking into account total turnover.

Further, the AO included this TP adjustment in the final assessment order. Subsequently, the CIT(A) held that the TP adjustment should be made only for the transactions with AE. The CIT(A) further allowed adjustment for capacity utilization and working capital besides allowing uniform treatment of forex gain and provision.

As per the above direction of CIT(A) TPO recalculated margins and accordingly deleted the TP adjustment.

According to Revenue TP adjustments were not to be confined to AE transactions since the nature of AE and non Associated Enterprise transactions was interlinked and any kind of restriction in making TP adjustments would create distortions in arriving at profits.

Assessee stated that according to settled law adjustments can be made only with respect to international transactions and not in respect of total turnover.

The Tribunal comprising Soundararajan K. [Judicial Member] and Prashant Maharishi [Vice President] upheld the CIT(A) approach and stated that ALP adjustments must be confined to international transactions with AEs. It rejected the Revenue arguments that adjustments should be made on the entire turnover noting that such an approach is inconsistent with settled law.

The Tribunal dismissed the Revenue appeal and affirmed the order of the Commissioner of Income Tax (Appeals) [CIT(A)] holding that Arm Length Price (ALP) adjustments are to be restricted only to AE transactions. The Bench held that this issue is settled by judicial precedents and found no infirmity in the CIT(A)’s directions.

The Bench also observed that issues relating to capacity utilization and working capital adjustments had already been verified and allowed by the TPO leaving no grievance for the Revenue.

Accordingly, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the ₹2.95 crore transfer pricing adjustment.

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