In a recent ruling, the Delhi High Court found that the Transfer Pricing Officer (TPO) cannot go beyond a remand order when such remand was based on a specific finding.
The Petitioner-company- engaged in the business of providing support services for sourcing of garments, handicrafts, leather products, etc. to its associated enterprises for which they charges a markup of 5% on its total cost in consideration for provision of sourcing support services to them.
For the relevant assessment year, the TPO accepted the application of the Transactional Net Margin method to benchmark the petitioner’s international transactions. Though the bench marking methodology by adoption of comparables was accepted by the TPO, he concluded the proceedings by finding that the petitioner was a trader and substituted its cost base from total costs to the FOB value of the goods exported to the third party customers. The DRP approved the order of the TPO in changing the cost base of the petitioner by restricting the mark up to 4% of the FOB value of goods.
On appeal, the ITAT, relying on an earlier decision in the own case of the petitioners, remanded by matter back to the TPO with a direction to undertake fresh determination of arm’s length price on the basis of correct cost base of the Petitioner in line.
Consequently, a fresh notice was issued by the Revenue proposing to reject the 53 comparable entities and had included some other entities, which according to the petitioner, has exceeded the scope of the remanded order.
On behalf of the Revenue, it was submitted that the notice was within jurisdiction since the ITAT had directed the TPO to determine the ALP of the transaction after excluding the FOB value of exports. For the purpose of determination of ALP, functional analysis of the comparables with FAR of assessee is required, which has been done by the TPO. It was also contended that the TPO/AO could doubt the appropriateness of the comparables used by the assessee.
Allowing the petition, the bench found that the operative part of the ITAT’s direction to carry out the exercise afresh since it did not have the figures relating to the comparables has to be therefore, seen in the context of what was actually done.
Justice Ravindra Bhatt said that the impugned order is not sustainable for two reasons. Firstly, when there is a remand on the basis of a specific finding, the TPO could not go beyond it. “Concededly there was no controversy about the appropriateness of inclusion of any comparable for the ALP determination purpose. Nor was there any finding or direction on that score. In the given circumstances, the Revenue could not have seized upon the direction to determine it “afresh” as the basis for going into the merits of inclusion of such comparables.”Secondly, the issue of comparables’ inclusion is not one that goes to define jurisdiction itself.
Read the full text of the Judgment below.