2017 (3) TMI 1806 - AT - Income Tax

Assessee wins transfer pricing dispute, Tribunal favors TNMM over CUP method

M/s. Cook India Medical Devices Private Limited Versus The Joint Commissioner of Income Tax (OSD),

M/s. Cook India Medical Devices Private Limited Versus The Joint Commissioner of Income Tax (OSD), - TMI Issues Involved:1. Economic analysis and arm's length nature of the international transaction.2. Justification of separate benchmarking for support services.3. Consideration of documentary evidence for support services.4. Classification of support services as 'stewardship/duplicative services.'5. Determination of arm's length price (ALP) for support services.6. Attribution of support services to Cook Hong Kong versus Cook Group Australia.7. Selection of the tested party for benchmarking the transaction.8. Appropriate method for determining ALP (TNMM vs. CUP).9. Computation of tax and interest liability.10. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Economic Analysis and Arm's Length Nature of the International Transaction:The assessee argued that the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) erred in not accepting the economic analysis undertaken by the assessee, which was conducted in accordance with the provisions of the Act and Rules. The AO and TPO concluded that the international transaction related to support services was not at arm's length, leading to an upward transfer pricing adjustment of Rs. 2,26,95,052.2. Justification of Separate Benchmarking for Support Services:The assessee contended that separate benchmarking of support services within the context of the overall distribution business was not justified by law. The submission of secondary analysis should not result in estoppel against the assessee, and benchmarking contrary to facts and law cannot be justified on that basis.3. Consideration of Documentary Evidence for Support Services:The AO, TPO, and DRP failed to consider the documentary evidence submitted by the assessee regarding the receipt of support services from Cook Asia Ltd., Hong Kong, William Cook Australia, Cook Medical Australia, and Cook Pan Pacific Pty. Limited (collectively referred to as 'Cook Group Australia').4. Classification of Support Services as 'Stewardship/Duplicative Services':The AO, TPO, and DRP classified the receipt of support services as 'stewardship/duplicative services.' The DRP observed that many of the services were duplicative in nature, and the assessee failed to explain how payments were made to its employees as well as its Associated Enterprises.5. Determination of Arm's Length Price (ALP) for Support Services:The AO, TPO, and DRP considered the ALP of the support services as NIL. The assessee argued that the AO erred in considering the support services at no value, despite the assessee having applied the Transaction Net Margin Method (TNMM) as the most appropriate method for international transactions.6. Attribution of Support Services to Cook Hong Kong versus Cook Group Australia:The AO, TPO, and DRP concluded that the documentary evidence submitted for information technology and regional sales support and product management services pertained only to services rendered by Cook Hong Kong and not from Cook Group Australia.7. Selection of the Tested Party for Benchmarking the Transaction:The AO, TPO, and DRP erred by considering the assessee as the tested party for benchmarking the transaction instead of the foreign Associated Enterprises (AEs), as determined by the assessee.8. Appropriate Method for Determining ALP (TNMM vs. CUP):The AO, TPO, and DRP rejected the Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP for the impugned transaction. Instead, they upheld the application of the Comparable Uncontrolled Price (CUP) method by the TPO, despite no corroborative analysis being undertaken.9. Computation of Tax and Interest Liability:The AO erred in not providing advance tax credit amounting to Rs. 5,00,000 and subsequently erroneously computed the tax and interest liability under Sections 234A and 234B of the Act.10. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under Section 271(1)(c) of the Act, which the assessee contended was erroneous.Judgment Analysis:Economic Analysis and Arm's Length Nature of the International Transaction:The Tribunal found that the AO and TPO did not justify the benchmarking of support services without appreciating the facts. The assessee had applied the TNMM method, while the TPO applied the CUP method. The Tribunal noted that the CUP method cannot be applied as the assessee had conducted a transaction net margin study.Justification of Separate Benchmarking for Support Services:The Tribunal agreed with the assessee that separate benchmarking of support services within the overall distribution business was not justified. The Tribunal emphasized that the TNMM method should be considered the most appropriate method.Consideration of Documentary Evidence for Support Services:The Tribunal found that the AO, TPO, and DRP did not consider the documentary evidence submitted by the assessee. The Tribunal emphasized the importance of considering such evidence in determining the ALP.Classification of Support Services as 'Stewardship/Duplicative Services':The Tribunal noted that the DRP classified many services as duplicative. However, the Tribunal found that the assessee had provided evidence of genuine services and payments made for business purposes.Determination of Arm's Length Price (ALP) for Support Services:The Tribunal disagreed with the AO, TPO, and DRP's conclusion that the ALP of support services was NIL. The Tribunal emphasized that the TNMM method should be used to determine the ALP.Attribution of Support Services to Cook Hong Kong versus Cook Group Australia:The Tribunal found that the AO, TPO, and DRP erred in attributing support services only to Cook Hong Kong. The Tribunal emphasized the need to consider services from Cook Group Australia as well.Selection of the Tested Party for Benchmarking the Transaction:The Tribunal agreed with the assessee that the foreign AEs should be considered the tested party for benchmarking the transaction, not the assessee.Appropriate Method for Determining ALP (TNMM vs. CUP):The Tribunal found that the TNMM method was more appropriate than the CUP method for determining the ALP. The Tribunal emphasized the need for a reliable measure of the ALP.Computation of Tax and Interest Liability:The Tribunal noted the AO's error in not providing advance tax credit and the erroneous computation of tax and interest liability. The Tribunal directed the AO to rectify these errors.Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was erroneous and directed the AO to reconsider the matter.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO and DRP to reconsider the disputed issues, taking into account the documentary evidence and the appropriate method for determining the ALP. The Tribunal emphasized the importance of considering the TNMM method and providing the assessee an opportunity to substantiate its claims.