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Facts
The assessee, a captive contract manufacturer, faced an upward adjustment of Rs. 13.98 crores by the TPO for AY 2015-16 regarding its international transactions. The CIT(A) partially allowed the assessee's appeal, directing the AO to adopt a 4.5% operating profit margin, which was based on an Advance Pricing Agreement (APA) entered into by the assessee with CBDT for subsequent assessment years (2021-22 to 2025-26). The Revenue appealed this decision, arguing against the retrospective application of the APA margin.
Held
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision. It held that the margin agreed under the APA could be adopted as the arm's length profit margin for the assessment year 2015-16 because there was no difference in the assessee's functional profile or the nature of international transactions between the relevant year and the APA period. The assessee's cross-objection, challenging the assessment on grounds of limitation and lack of signature, was dismissed as infructuous.
Key Issues
Whether the operating profit margin agreed under an Advance Pricing Agreement (APA) for future assessment years can be applied to an earlier, non-APA covered assessment year, given similar functional profile and transactions.
Sections Cited
250, 143(2), 92CA(3), 144C(1), 144C(3), 92CCA(4)
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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE KAND SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the Revenue and cross objection at the instance of the assessee are directed against the order of the Commissioner of Income Tax (Appeals), Chennai-16 dated
- 2 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024 25.01.2024 passed u/s.250 of the Income Tax Act (hereinafter the ‘Act’). The relevant assessment year is 2015-16.
Brief facts of the case are as follows: The assessee is a private limited company. It is a captive contract manufacturer in processing and export of crab meat to its Associated Enterprise (AE). For the assessment year 2015-16, return of income was filed on 11.11.2015 disclosing total income of Rs.1.71 crores. The assessment was selected for limited scrutiny and notice u/s.143(2) of the Act was issued. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction undertaken by the assessee with its AE. The TPO vide order dated 01.11.2019 passed u/s.92CA(3) of the Act proposed upward adjustment of Rs.13.98 crores to the assessee’s margin from export of its manufactured product to its AE. In this context, it is relevant to note that said adjustment was determined by the TPO by adopting the assessee’s foreign AE as the tested party, upon rejecting the assessee’s TP documentational and benchmarking analysis.
- 3 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024 3. Subsequently, the AO passed draft assessment order on 28.11.2019 u/s.144C(1) of the Act and the final assessment order on 05.02.2020 u/s.144C(3) of the Act after incorporation the adjustment proposed by the TPO.
4. Aggrieved by the proposed adjustment of the TPO, assessee filed appeal before the CIT(A) challenging the adjustment proposed by the TPO. The assessee has also raised legal contentions stating that final assessment order was passed in violation of limitations prescribed under the Act. The CIT(A) dismissed the legal ground challenging the validity of TPO order and the final assessment order. As regards the issues on merits, the assessee furnished the Unilateral Advance Pricing Agreement (APA) entered on 25.08.2023 between CBDT for the assessment years 2021-22 to 2025-26 in support of its functional analysis and contention that assessee ought to be considered as a tested party. The CIT(A) concurred and held that assessee company shall be considered as tested party. Further, the CIT(A) directed the AO to adopt the margin mutually agreed under the APA i.e., 4.5% [operating profit (OP) / operating cost (OC)] as arm’s length profit margin for the impugned assessment year and accordingly determined the TP adjustment of 4.15 crores. Hence the appeal of the assessee was partly-allowed.
- 4 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024
Aggrieved by the order of the CIT(A), the Revenue has filed the appeal in 1.Whether on facts and circumstances of the case, the ld. CIT(A) was justified in adjudicating based on the additional grounds and evidences filed by the assessee in the form of Advance Pricing Agreement (APA) dated 25.08.2023, when the same document did not exist while passing the order u/s 92CA(3) dated 01.11.2019 and no remand report was called for in accordance with Sub-Rule 3 of Rule 46A of the I.T.Rules. 2.Whether on the facts and circumstances of the case, the Id. CIT(A) was justified in adopting the Margins as stipulated in APA to Non-APA covered year as the Margins in those years could only be comparable to the Margins of the comparables in the contemporary period. 3.Whether on the facts and in the circumstances of the case, the ld.CIT(A) was justified in holding that it is reasonable to consider the operating margin agreed in the advance pricing agreement entered by the assessee with the CBDT for the FY 2020-21 to 2024-25 and directed the TPO/AO to consider the APA agreement while passing order giving effect to the appeal for the Asst. Year 2015-16 when the agreement was entered for the FY 2020-21 to 2024-25.
For these and such other grounds that may be adduced at the time of hearing, it is prayed that the order of the Id. CIT(A) may be reversed and that of the Assessing Officer restored.
The Ld.DR has filed the order of Pune Bench of the Tribunal in the case of DCIT vs. M/s.AGS Customer Services India P. Ltd., in & CO No.22/PUN/2022 dated 16.09.2022 and contended that for the relevant assessment year, the CIT(A) has - 5 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024 erred in adopting 4.5% as arm’s length profit margin. It was submitted that the APA agreement is for assessment years 2021-22 to 2025-26. Hence, in view of provision of section 92CCA(4) of the Act, the relevant assessment year will not get covered or rolled back for adopting the APA margin of 4.5%.
Per contra, the Ld.AR relied on the following judicial pronouncements in support of her contention that CIT(A) is justified in directing the AO/TPO to adopt the APA net profit of 4.5% as arm’s length profit margin for the relevant assessment year:- i. Hon’ble Delhi High Court in the case of Springer India Pvt. Ltd., reported in TS-403-HC-2023 DEL-TP ii. Hon’ble Delhi High Court in the case of Ameriprise India (P.) Ltd., reported in 78 taxmann.com 373 iii. Chennai Bench of the Tribunal in the case of Kone Elevator India Pvt. Ltd., in IT(TP)A No.85/CHNY/2019 iv. Bangalore Bench of the Tribunal in the case of Timken Engineering & Research India Pvt. Ltd., in v. Delhi Bench of the Tribunal in the case of FIS Global Business Solutions India Pvt. Ltd, in /Del/2019.
We have heard rival submissions and perused the material on record. The assessee had concluded the APA process and entered into APA agreement with CBDT on 25.08.2022. The APA covers the assessment years 2021-22 to 2025-26. In the said APA agreement,
- 6 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024 CBDT had accepted the assessee itself to be selected as tested party with respect to international transactions undertaken by the assessee, with operating profits percentage on operating cost of the assessee benchmarked for arm’s length purposes. The business activities and the international transaction of the assessee company during the relevant assessment year have remained the same during the APA period as well. Since there is no difference in functional profile or in the nature of international transaction undertaken during the APA period and the year of consideration, the various judicial pronouncements relied on by the assessee cited supra had categorically held that adopting of margin mutually agreed under the APA can be adopted as arm’s length profit margin for the relevant assessment year. Therefore, we hold that the CIT(A)’s order is correct and no interference is called for. Hence, the appeal filed by the Revenue is dismissed.
CO No.17/CHNY/2024 9. In the cross objection, the assessee has raised legal grounds stating that assessment proceedings is barred by limitation. The assessee also raised contention that the orders are invalid since the same is without signature. Since the Department’s appeal has been dismissed, the legal contention that is raised in the cross objection is - 7 - ITA No,739/CHNY/2024 & CO No.17/CHNY/2024 not adjudicated since the Ld.AR had not raised any specific arguments on the grounds raised in the cross objection. Therefore, the cross objection filed by the assessee is dismissed as infructuous.
In the result, the appeal filed by the Revenue and the cross objection filed by the assessee are dismissed.
Order pronounced in the open court on 8th July, 2025 at Chennai.