2016 (3) TMI 1114 - AT - Income Tax

Tribunal Upholds Transfer Pricing Method, Directs Reevaluation

Mercedes-Benz Research and Development India Pvt. Ltd. Versus The Assistant Commissioner of Income Tax, Circle 12 (1), Bangalore.

The Tribunal upheld the Transfer Pricing Officer's adoption of the Transactional Net Margin Method (TNMM) over the Cost Plus Method (CPM) or Comparable ... Transfer pricing adjustment - most appropriate method for TP analysis - Held that:- It was fairly admitted that rate per hour is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee’s comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no option than to accept the TPO’s contention of TNMM as the most appropriate method. 5.8 Under section 92C of the Act, ALP has to be examined adopting the most appropriate method. In view of absence of reliable data either to adopt Cost Plus Method or to analyse the data on the basis of CUP method, either internal CUP or external CUP, we are of the opinion that under given facts and circumstances of the case, TNMM is the only option available to the TPO to analyse the assessee’s transactions in order to arrive at the ALP. Therefore, we reject the assessee’s contentions on CUP/CPM as most appropriate method and approve the approach taken by the TPO for analyzing transactions under TNMM. As the assessee contended that the reimbursement costs are included in the working , the actual working of TPO is not verifiable we restore the issue to the file of TPO to examine the computation again by excluding the reimbursement cost since it do not have any profit margin and also to consider whether the companies fail the RPT filter or not. Assessee should be given due opportunity and its working should be considered after due examination. The grounds relating to this issue are allowed for statistical purposes. Exclusion of foreign exchange fluctuation from the working of operating margins of the company - Held that:- We direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies Risk adjustment - Held that:- As found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee’s transaction with its AE. It is ordered accordingly Issues Involved:1. The most appropriate method for Transfer Pricing (TP) analysis.2. Comparability of certain companies, working of operating margins, and risk analysis under the TP provisions.3. Multiple year data.4. Power of TPO under section 133(6) for obtaining data not in the public domain.5. Various filters adopted.Detailed Analysis:1. The Most Appropriate Method for TP Analysis:The primary issue was whether the Cost Plus Method (CPM) or the Transactional Net Margin Method (TNMM) was the most appropriate method for TP analysis. The assessee initially adopted CPM and provided an alternative working under the Comparable Uncontrolled Price (CUP) method. The Transfer Pricing Officer (TPO) rejected these methods, citing the absence of necessary data and the reliance on assumptions. The TPO instead adopted TNMM, which was upheld by the Dispute Resolution Panel (DRP). The Tribunal agreed with the TPO, stating that in the absence of reliable data for CPM or CUP, TNMM was the most appropriate method under the given circumstances.2. Comparability of Certain Companies, Working of Operating Margins, and Risk Analysis:The Tribunal addressed the comparability of certain companies selected by the TPO. The assessee objected to the inclusion of eleven companies, arguing they were not comparable. The Tribunal referred to various decisions from coordinate benches and directed the exclusion of these companies from the list of comparables, as they were functionally dissimilar or had other issues affecting comparability. The Tribunal also directed the TPO to reconsider the inclusion of Aditya Birla Minacs IT Services Ltd. and Aditya Birla Minacs Technologies Ltd., which were excluded by the TPO due to related party transactions (RPT). The Tribunal instructed the TPO to exclude reimbursement costs from the computation of RPT and re-evaluate their comparability.3. Multiple Year Data:The issue of using multiple year data was raised by the assessee but was considered academic as no submissions were made on this point. The DRP had held against the assessee based on various decisions of coordinate benches of ITAT.4. Power of TPO under Section 133(6) for Obtaining Data Not in the Public Domain:The assessee raised the issue of the TPO's power under section 133(6) to obtain data not in the public domain. However, this was also considered academic as no submissions were made, and the DRP had held against the assessee based on previous decisions.5. Various Filters Adopted:The assessee objected to the various filters adopted by the TPO. However, this issue was also considered academic as no submissions were made, and the DRP had held against the assessee based on previous decisions.Foreign Exchange Fluctuation:The Tribunal directed that foreign exchange gains or losses should be considered as part of the operating revenue or cost while computing the operating margin of the assessee and the comparables, following the decision in the assessee's own case for the previous year.Risk Adjustment:The Tribunal directed the TPO to make suitable adjustments for differences in the risk profile of the assessee compared to the comparables, following the decision in the assessee's own case for the previous year.Conclusion:The Tribunal directed the Assessing Officer/TPO to work out the Arm's Length Price (ALP) of the assessee in accordance with its directions. If the differential in the margin of the assessee and the comparables exceeded the 5% bandwidth recognized in the proviso to section 92C(2) of the Act, an adjustment was to be made to the reported value of the assessee's transaction with its Associated Enterprise (AE). The appeal was allowed partly for statistical purposes.