Tribunal favors Cost Plus Method over TNMM in transfer pricing analysis

The Tribunal allowed the appeal of the assessee, ruling in favor of consistent application of the Cost Plus Method (CPM) for determining the Arm's Length Price (ALP) and rejecting the Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI) in transfer pricing analysis. The Tribunal emphasized the importance of consistency in applying transfer pricing methods and upheld the assessee's contention regarding the suitability of comparables, specifically Kerala Travel Interserve Ltd, in the transfer pricing analysis.

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Issues:
1. Rejection of Cost Plus Method (CPM) and adoption of TNMM as the Most Appropriate Method for determining Arm’s Length Price (ALP).
2. Suitability of Kerala Travel Interserve Ltd as a comparable entity for transfer pricing analysis.

Analysis:

Issue 1: Rejection of CPM and Adoption of TNMM
The appeal was filed by the assessee contesting the rejection of the Cost Plus Method (CPM) for determining the Arm’s Length Price (ALP) and the adoption of Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) held that TNMM would be more appropriate as it considers all costs relevant to services provided to associated enterprises (AE). An upward adjustment was suggested by the TPO, leading to objections by the assessee before the Dispute Resolution Panel (DRP). The DRP directed the TPO to include Kerala Travel Interserve Ltd in the comparables list and recompute the ALP. The assessee challenged the adoption of TNMM and the comparability of Kerala Travel Interserve Ltd.

Issue 2: Suitability of Kerala Travel Interserve Ltd
The assessee argued for the acceptance of CPM as the most appropriate method, citing consistency in previous and subsequent assessment years where CPM was accepted. The Tribunal noted that there was no change in the business model of the assessee between the relevant assessment years. Following the rule of consistency and relying on a previous Tribunal decision in a similar case, the Tribunal held that CPM was the most appropriate method for determining ALP in the present case. Consequently, the suitability of Kerala Travel Interserve Ltd as a comparable entity was not considered, and the grounds of appeal by the assessee were allowed, resulting in the appeal being allowed in favor of the assessee.

In conclusion, the Tribunal accepted the appeal of the assessee, ruling in favor of the consistent application of the Cost Plus Method (CPM) for determining the Arm’s Length Price (ALP) and rejecting the Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI) in the transfer pricing analysis. The Tribunal emphasized the importance of consistency in applying transfer pricing methods and upheld the assessee’s contention regarding the suitability of comparables, specifically Kerala Travel Interserve Ltd, in the transfer pricing analysis.

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