ITAT Mumbai Sets Aside ₹1.14 Crore Transfer Pricing Adjustment For Lack Of Proper FAR Analysis

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 6 January set aside a transfer pricing adjustment of Rs. 1.14 crore against Corporate Worldwide Stay LLP, after finding that the revenue authorities had proceeded on assumptions about the firm's functions and risks without a proper FAR analysis.

The bench, comprising Judicial Member Anikesh Banerjee and Accountant Member Vikram Singh Yadav remitted to the assessing officer and transfer pricing officer for fresh adjudication.

The tribunal noted:

“On a perusal of the orders of the revenue authorities, it is evident that the Transfer Pricing Officer as well as the Dispute Resolution Panel have proceeded on certain assumptions with regard to the nature of activities performed by the assessee and the AE, particularly in relation to customer acquisition, negotiation, booking, payment processing and risk assumption.”

In the original assessment, the authorities had made an upward transfer pricing adjustment of Rs. 1.14 crore for transactions with the LLP's Mauritius-based associated enterprise, treating reimbursements of expenses as international transactions and applying the profit split method. This method divides profits between related entities according to the roles, assets, and risks of each party. The Dispute Resolution Panel subsequently reduced the adjustment to Rs. 90.45 lakh while granting partial relief.

The ITAT observed that the revenue authorities had assumed roles and risks for the assessee that were inconsistent with its claim that it merely made payments on behalf of the associated enterprise on a cost-to-cost basis without any mark-up.

It further noted that the reasons for adopting the profit split method were not clearly explained, and that profit attribution required fresh examination supported by documentary evidence.

Accordingly, the tribunal set aside the impugned assessment order, including the adjustment upheld by the DRP, and remanded the matter to the assessing officer and transfer pricing officer.

It directed the authorities to re-examine the nature of the transactions, the definition of “international transaction”, justification for adoption of the profit split method, and the initiation of penalty proceedings, after granting the taxpayer a reasonable opportunity to be heard. It stated that a speaking order must be passed.

For Appellants: Advocate Ketan Vajani