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2025 Supreme(Online)(ITAT) 21879
INCOME TAX APPELLATE TRIBUNAL (PUNE BENCH)
R.K. Panda, Vice-President, Astha Chandra, Judicial Member
Lear Automotive India Private Limited – Appellant
Versus
Asst. Commissioner of Income Tax – Respondent
ITA No.554/PUN/2024
For the Appellants/Petitioners: Dhanesh Bafna, Riddhi Maru
For the Respondents: Prakash L. Pathade
Transfer pricing adjustments made on an ad-hoc basis without reference to prescribed statutory methods or verifiable comparable uncontrolled transactions are legally unsustainable. The application of the ‘Other Method’ requires specific, evidence-based justification through identified comparables, rather than arbitrary percentage adjustments.
Headnote:(A) Income Tax Act, 1961 - Sections 92C and 144C(5) - Transfer Pricing - Arm’s Length Price (ALP) - Computation - Ad-hoc adjustment - It is a settled position of law that the determination of the ALP of the international transaction on an ad-hoc basis dehors the Act by merely asserting that the ‘Other Method’ is applied cannot be sustained. (Paras 11, 12, 14 and 16)
(B) Income Tax Rules, 1962 - Rule 10AB - Determination of ALP - Requirement for comparability - The application of the ‘Other Method’ requires the tax authority to bring on record a suitable comparable uncontrolled transaction to justify the applicability and reliability of the method employed; failure to do so renders the adjustment unsustainable in law. (Paras 11, 13 and 16)
Facts of the case:
The assessee, engaged in manufacturing and services, received support services from its foreign entity. In reassessment proceedings regarding the allocation of regional headquarter charges, the tax authority rejected the assessee’s transfer pricing study and applied the ‘Other Method’ under the relevant rules to create an ad-hoc adjustment of 50% of the charges paid, citing the unavailability of comparable data using other methods.
Findings of Court:
The Court observed that the tax authority failed to identify any comparable uncontrolled transactions as required by statute. The use of an arbitrary ad-hoc percentage to determine ALP without following prescribed methodology is contrary to established legal principles and statutory requirements.
Issues: Whether the ad-hoc adjustment of 50% of regional headquarter charges made by the tax authority under the ‘Other Method’ is sustainable in law when no comparable uncontrolled transaction data is provided.
Ratio Decidendi: An adjustment to the Arm’s Length Price must be based on a prescribed method under the statute. Applying the ‘Other Method’ without identifying specific comparable uncontrolled transactions or the price charged therein is arbitrary and fails the statutory requirement for transparency and comparability in transfer pricing.
Result: Appeal allowed.
| Table of Content |
|---|
| 1. procedural history and factual context of transfer pricing dispute. (Para 1 , 2) |
| 2. assessee's arguments against ad-hoc benchmarking and for aggregation approach. (Para 4 , 5) |
| 3. tpo's failure to follow tribunal directions and valid benchmarking methods. (Para 6 , 7 , 8 , 9) |
| 4. ad-hoc determination of alp without prescribed methodology is unsustainable. (Para 10 , 11 , 12 , 13 , 14) |
| 5. acceptance of aggregation approach using tnmm to delete arbitrary tp adjustments. (Para 15 , 16 , 17) |
आदेश / ORDER
PER ASTHA CHANDRA, JM :
The appeal filed by the assessee is directed against the order dated 22.01.2024 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National e-Assessment Center, Delhi (“Ld. AO”) in pursuance of the directions issued by Dispute Resolution Panel-3, Mumbai (“Ld. DRP”) dated 26.12.2023 u/s 144C(5) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2016-17.
This is a second round of proceedings before the Tribunal. Briefly stated, the facts of the case are that the assessee, Lear Automotive India Private Limited (“Lear India”) is a wholly owned subsidiary of Lear Corporation (Mauritius) Limited which in turn is a wholly owned subsidiary of Lear USA. The assessee company is primarily engaged in the manufacture and assembly of automotive seating and electrical systems. It also provides design and engineering support services to its group companies and customers in the automotive industry, particularly in relation to automotive seating systems and interiors. All the factories operated by the assessee are cumulatively referred to as the ‘manufacturing segment’ and the engineering centers are referred to as India (IEC) segment or ‘service segment’.
First round of assessment proceedings:
2.1 For AY 2016-17, the assessee filed its return of income on 17.10.2016 declaring total income of Rs.27,72,90,010/-. The case of the assessee was selected for scrutiny under CASS. During the relevant AY, the assessee had entered into various international transactions with its Associated Enterprises (“AEs”) and therefore the case was referred to the Ld. Transfer Pricing Officer (“TPO”). In the first round of the assessment proceedings, the Ld. TPO vide his order dated 31.10.2019 made transfer pricing adjustment of Rs.109,99,25,961/- with respect to the following transactions : (i) International transaction related to manufacturing segment; (ii) Allocation of Regional Headquarter Charges (RHQ Charges) and (iii) Payment of Global Software Charges. Pursuant to the said order of the Ld. TPO, the Ld. Assessing Officer (“AO”) passed the draft assessment order u/s 144C(13) of the Income Tax Act, 1961 (the “Act”) dated 22.12.2019 against which the assessee filed objection before the Ld. Dispute Resolution Panel (“DRP”). However, the assessee’s objections were rejected by the Ld. DRP vide its order dated 22.03.2021. Pursuant thereto, the final assessment order was passed by the Ld. AO u/s 143(3) r.w.s. 144C(13) of the Act on 08.05.2021 at assessed income of Rs.137,72,15,970/- by making addition of Rs.109,99,25,961/- on account of transfer pricing adjustment to the income of Rs.27,72,90,010/- returned by the assessee. The assessee challenged the said addition before the Tribunal by filing an appeal in ITA No. 213/PUN/2021. The Tribunal vide its order dated 04.08.2021 set aside the impugned order of the Ld. AO passed on 08.05.2021 and directed the Ld. TPO/AO to restrict the transfer pricing adjustment only in respect of transactions with AEs under the manufacturing activity, after allowing opportunity of hearing to the assessee.
Second round of assessment proceedings/remand back proceedings :
2.2 On fresh reference to the Ld. TPO by the Ld. AO pursuant to the order of the Tribunal dated 04.08.2021, the Ld. TPO passed an order u/s 92CA(3) r.w.s. 254 dated 30.03.2023 readjusting the value of international transactions to Rs.14,31,80,980/- as against Rs
