2019 (12) TMI 1630 - HC - Income Tax

Court upholds ITAT decision favoring Assessee, preferring TNMM over CUP method due to lack of comparables.

The Court dismissed all appeals, upholding the ITAT's decision in favor of the Assessee. The Tribunal's preference for the TNMM method over the CUP method ... TP Adjustment - MAM selection - TNMM Method OR CUP Method - HELD THAT:- The conclusion of the ITAT could not be faulted as the same was inconsonance with the provisions of the Act and the Rules. The contention of the Counsel for the revenue cannot be accepted as the Tribunal while upholding the TNMM Method has observed that the other methods prescribed under the Act namely the CUP or Cost Plus Method being not applicable in the facts and circumstances of the case, the Respondent Assessee could only resort to TNMM as the most appropriate method to show that its profit margin from international transactions was at arm’s length. Tribunal has concluded that the expenses paid to the employees of the A.E. were in the nature of reimbursement of their salaries without any mark up. Thus, the payment per se was to third party employees and not to any related party for services rendered. In light of the findings of the fact arrived at by the ITAT, the questions of law raised are answered against the revenue and in favour of the assessee. Issues:1. Transfer pricing adjustments for Assessment Years 2007-08, 2009-10, and 2010-11.2. Applicability of the Comparable Uncontrolled Price (CUP) method.3. Use of Transactional Net Margin Method (TNMM) for determining Arm's Length Price.4. Segregation of Intra Group Services transactions.5. Reimbursement of employee salaries without mark-up.Issue 1: Transfer pricing adjustmentsThe Respondent Assessee, a private limited company, filed its return of income for A.Y. 2007-08, declaring total income. The Transfer Pricing Officer proposed adjustments for various services under the CUP method, leading to significant additions. Despite objections, the Assessing Officer made substantial additions based on the TPO's observations.Issue 2: Applicability of CUP methodThe ITAT partly allowed the appeal, emphasizing that the TPO's application of the CUP method lacked comparables and was incorrect in requiring an increase in profits to justify prices. The ITAT concluded that the TNMM method was more appropriate due to the nature of activities involved, assets used, and risks assumed, leading to adjustments in the Assessee's favor.Issue 3: Use of TNMMThe Tribunal upheld the TNMM method as the most appropriate for determining the Arm's Length Price, as the CUP or Cost Plus methods were deemed inapplicable. The Assessee's profit margins were found to be at arm's length, and the expenses paid to employees were considered reimbursements without mark-up, favoring the Assessee.Issue 4: Segregation of Intra Group ServicesThe ITAT concluded that the segregation of Intra Group Services transactions was not correct, emphasizing that the CUP method lacked comparables to substantiate the AE's services to an independent enterprise. The Tribunal held that the TNMM method was justified in this context.Issue 5: Reimbursement of employee salariesThe ITAT found that payments to AE employees were reimbursements without any mark-up, clarifying that the payments were to third-party employees for services rendered, not related parties. This finding supported the Assessee's position.In conclusion, the Court dismissed all three appeals, upholding the ITAT's decision in favor of the Assessee. The Tribunal's reliance on the TNMM method over the CUP method was deemed appropriate, considering the lack of comparables and the nature of the transactions involved. The Assessee's profit margins were found to be at arm's length, and the payments to employees were considered reimbursements without any mark-up, leading to a favorable outcome for the Assessee.