2020 (11) TMI 1102 - AT - Income Tax

Tribunal directs AO/TPO to use TNMM with Berry ratio, emphasizes comparable transactions, rejects CUP method.

The Tribunal directed the matter back to the AO/TPO to benchmark international transactions using TNMM with Berry ratio as PLI. The assessee must ... TP Adjustment - allocation of expenses - assessee submitted he had determined the percentage of profit by allocating expenses incurred on the basis of gross margin earned by AEs other than Sumitomo Corporation Japan, and by non-AEs whereas the TPO had allocated after assuming 26% of the gross profit earned by non-AEs and, thereafter had allocated expenses in proportion of gross profit - TPO, in the instant case proposed an adjustment on protective basis in respect of indent segment of AEs other than Sumitomo Corporation, Japan by considering 5% as the arm’s length commission rate for commission received - DRP while holding that no protective adjustment is required and the addition has to be made on substantive basis, directed the TPO to apply 3.03% as CUP for adjustment. HELD THAT:- Respectfully following the consistent decision of the Tribunal in assessee’s own case for AYs 2007-08-2011-12 [2018 (10) TMI 1785 - ITAT DELHI] for AYs 2013-14 [2019 (5) TMI 1440 - ITAT DELHI] we restore the issue to the file of the AO/TPO with a direction to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking ‘berry ratio’ as PLI. The assessee has to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm’s length. Needless to say, the AO/TPO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes. Issues Involved:1. Determination of the arm's length price (ALP) for international transactions.2. Reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Income-tax Act.3. Application of the Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) method.4. Jurisdiction and directions of the Dispute Resolution Panel (DRP).5. Protective versus substantive adjustments in transfer pricing.6. Benchmarking of transactions with Associated Enterprises (AEs) other than Sumitomo, Japan.7. Validity and application of Bilateral Advance Pricing Agreement (BAPA).Detailed Analysis:1. Determination of the Arm's Length Price (ALP) for International Transactions:The primary issue revolves around the determination of the ALP for international transactions between the assessee and its Associated Enterprises (AEs). The assessee contested the addition of Rs. 19,00,34,764 made by the Assessing Officer (AO) based on the TPO's adjustment. The TPO had initially proposed an adjustment of Rs. 43,69,67,350 on a protective basis, which was later revised by the DRP to Rs. 19,00,34,764 on a substantive basis.2. Reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Income-tax Act:The assessee argued that the reference made by the AO to the TPO was not in accordance with Section 92CA(1) of the Act and that no opportunity of being heard was granted at any stage of the proceedings. This was contested as a procedural lapse affecting the legality of the TPO's order.3. Application of the Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) Method:The TPO had used the TNMM with Operating Profit/Operating Expenses (OP/OPEX) as the Profit Level Indicator (PLI) for benchmarking transactions with Sumitomo, Japan, which was covered under the BAPA. However, for transactions with other AEs, the TPO initially proposed a protective adjustment using the CUP method, which the DRP later directed to be substantive. The Tribunal held that TNMM with Berry ratio as PLI should be applied for benchmarking all international transactions, following consistent decisions in earlier years.4. Jurisdiction and Directions of the Dispute Resolution Panel (DRP):The DRP directed the TPO to apply 3.03% as CUP for adjustment on a substantive basis. The Tribunal found this direction erroneous, as it contradicted the established method (TNMM) and the findings of the Hon'ble High Court and earlier Tribunal orders. The Tribunal restored the matter to the AO/TPO to benchmark transactions using TNMM with Berry ratio as PLI.5. Protective versus Substantive Adjustments in Transfer Pricing:The assessee argued against the concept of protective adjustments in transfer pricing, asserting that once transactions are determined to be at arm's length, no further adjustments should be made. The Tribunal agreed, stating that the TPO should not have proceeded with protective adjustments once TNMM was determined as the most appropriate method.6. Benchmarking of Transactions with AEs Other than Sumitomo, Japan:The TPO had benchmarked transactions with AEs other than Sumitomo, Japan, at the same rate of profitability as those with Sumitomo, Japan, under the BAPA. The Tribunal directed that these transactions should also be benchmarked using TNMM with Berry ratio as PLI, ensuring consistency and adherence to the established method.7. Validity and Application of Bilateral Advance Pricing Agreement (BAPA):The assessee had entered into a BAPA with the Central Board of Direct Taxes (CBDT), covering transactions with Sumitomo, Japan. The Tribunal emphasized that the BAPA should be respected, and transactions with Sumitomo, Japan, were correctly benchmarked under TNMM. For other AEs, the same method should be applied, ensuring uniformity and compliance with the BAPA.Conclusion:The Tribunal restored the matter to the AO/TPO with directions to benchmark the international transactions using TNMM with Berry ratio as PLI. The assessee was directed to substantiate its margins with comparable uncontrolled transactions. The Tribunal emphasized the need for adherence to the established method (TNMM) and consistency in benchmarking transactions, rejecting the application of protective adjustments and the CUP method. The appeal was allowed for statistical purposes, with the AO/TPO to decide the issue as per the facts and law, following due process and providing an opportunity for the assessee to be heard.