2016 (3) TMI 55 - HC - Income Tax

High Court affirms Transfer Pricing Method, stresses Assessee's Explanation

Denso India Limited Versus Commissioner of Income Tax

The High Court upheld the Income Tax Appellate Tribunal's decision to apply the Comparable Uncontrolled Price (CUP) method for transfer pricing ... Transfer pricing adjustment - determination ALP by adopting the CUP method for the procurements from Sumitomo Japan - Held that:- What the assessee banks upon in its appeal to this Court is the unbending and inflexible acceptance of its TP exercise; according to its logic, a 'bundled' or aggregated series or chain of transactions used in the TP report should remain undisturbed. Now, there can be no dispute that the AO would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan. The 'second test' spoken of in Sony Ericcson (2015 (3) TMI 580 - DELHI HIGH COURT) i.e 'the form and substance of the transaction were the same but the arrangements made in relation to a transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner..' was in effect adopted. This Court finds no infirmity in this approach. As a result, the first question framed is answered against the assessee and in favour of the revenue. As far as the second question, i.e the adoption of CUP method being contradictory with the ITAT's decision is concerned, there was no argument on behalf of the appellant. That apart, noticeably at the time of framing the question the Court recorded that it was framed at the insistence of the assessee's counsel. In view of the findings on the first question and in view of these facts, this question too is answered in favour of the revenue and against the assessee. Issues Involved:1. Appropriateness of the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) Method.2. Alleged contradiction in the Income Tax Appellate Tribunal's (ITAT) order regarding the application of the CUP method.Detailed Analysis:1. Appropriateness of TNMM vs. CUP Method:The core issue revolves around whether the Transactional Net Margin Method (TNMM) adopted by the assessee is the most appropriate method under Section 92C(2) of the Income Tax Act, 1961, and Rule 10C of the Income Tax Rules, 1962, or if the Income Tax Appellate Tribunal (ITAT) erred in directing the Assessing Officer (AO) to apply the Comparable Uncontrolled Price (CUP) method.The appellant/assessee is engaged in the manufacturing and sale of auto electrical products and has significant shareholding from two Japanese companies. For the assessment years 2002-03 and 2003-04, the assessee imported a large portion of its raw materials from Sumitomo Corporation, Japan, which is closely associated with the assessee and Denso Corporation, Japan.The AO referred the case to the Transfer Pricing Officer (TPO), who recommended a transfer pricing adjustment based on the CUP method, leading to additions of Rs. 1.36 crores for AY 2002-03 and Rs. 97 lakhs for AY 2003-04. The CIT(A) initially canceled these adjustments, but the ITAT restored them.The assessee argued that the TNMM method, which aggregates all transactions for benchmarking international transactions, was appropriately applied. The TPO, however, accepted the TNMM for royalty, technical knowhow, and testing fees but rejected it for component purchases, applying the CUP method instead. The assessee contended that this selective application was unjustified and unsupported by law, relying on OECD guidelines and various ITAT rulings.The revenue, on the other hand, justified the TPO's approach, arguing that the transactions with Sumitomo Corporation were influenced by its association with Denso, Japan, and the assessee. The TPO found that Sumitomo Corporation did not manufacture but merely traded the goods, and the assessee failed to provide a reasonable explanation for sourcing materials through Sumitomo instead of directly from Denso, Japan.The High Court noted that the primary onus is on the assessee to ensure accurate and reasonable TP reports. The AO is obligated to scrutinize these reports critically. The Court found no infirmity in the TPO's approach, which adopted the CUP method due to the unexplained and unusual features of the transactions.2. Alleged Contradiction in ITAT's Order:The second issue questioned whether there was a contradiction in the ITAT's order regarding the application of the CUP method. The High Court found no argument from the appellant on this point and noted that the question was framed at the insistence of the assessee's counsel. Given the findings on the first issue, the Court concluded that there was no contradiction and answered this question in favor of the revenue.Conclusion:The High Court dismissed the appeals, upholding the ITAT's decision to apply the CUP method for the transfer pricing adjustments. The Court emphasized the necessity for the assessee to provide convincing explanations for its transactions and found the TPO's scrutiny and subsequent adjustments justified. Both questions framed were answered against the assessee and in favor of the revenue.