Koch Chemical Technology Group (India) Ltd. v. ACIT (Oct 2015)
The Mumbai Bench of the Income-tax Appellate Tribunal held that the Transfer Pricing Officer is required to determine the arm’s length price by applying any one of the methods prescribed under section 92C of the Income-tax Act, 1961. Accordingly, the tribunal concluded that: (1) when the taxpayer has submitted a report from an “approved valuer” indicating the fair market value of purchased machinery; (2) before rejecting this valuation report, the Transfer Pricing Officer must refer the issue of the machinery valuation to the Departmental Valuation Officer (as per the procedure set forth in the statute). Moreover, the tribunal found that the arm’s length price of a cost sharing arrangement cannot be “nil” in absence any valid findings by the Transfer Pricing Officer.
The taxpayer is a subsidiary of a company in Mauritius, whose ultimate parent company is a U.S. corporation. The taxpayer is engaged in manufacturing mass transit equipment, and related application process, design, and engineering services.
During assessment proceedings for 2006-07, the Transfer Pricing Officer rejected the value assigned by the taxpayer to fixed asset purchases (including second-hand machinery), based on appraisals from an “approved valuer” in the United States. The Transfer Pricing Officer found that the values were not at arm’s length, and made a 50% adjustment to the second-hand machinery valuation. The Transfer Pricing Officer also rejected the taxpayer’s cost sharing arrangement valuation, and instead assigned a valuation of “nil.” The Dispute Resolution Panel upheld the assessments.
The tribunal, however, held that the Transfer Pricing Officer can only make an adjustment based on substantive evidence; is not allowed to reject the valuation assigned by an approved valuer; but must instead refer the valuation issue to the Departmental Valuation Officer.