TPO directed to reconsider MAM selection between TNMM and CUP methods for transfer pricing under section 92CA(3)

The ITAT Delhi remanded the transfer pricing addition under section 92CA(3) back to the TPO following the Delhi HC's direction to apply TNMM at entity level. The HC had previously rejected the aggregation approach under TNMM for benchmarking international transactions relating to royalty and technical services, following the precedent in Magneti Marelli case. The TPO was directed to reconsider the MAM selection between TNMM and CUP methods. The assessee's appeal was allowed for statistical purposes with the matter being remitted for fresh consideration by AO/TPO.

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Issues Involved:
1. Addition of Rs. 8,35,79,669/- to the income of the assessee under section 92CA(3) by the TPO.
2. Rejection of aggregation approach under TNMM for benchmarking international transactions.
3. Assumption of multiple-year data for TNMM method.
4. Comparable analysis under TNMM versus CUP method.
5. Rejection of comparables in TP study.
6. Benchmarking transactions of Royalty and FTS payments under CUP Method.
7. Charging of interest under section 234B.

Detailed Analysis:

Addition of Rs. 8,35,79,669/- to the Income of the Assessee:
The main grievance of the assessee pertains to the addition of Rs. 8,35,79,669/- proposed by the TPO under section 92CA(3) of the Income Tax Act, 1961, and subsequently made by the AO. The TPO determined the Arm’s Length Price (ALP) for royalty and Fees for Technical Services (FTS) payments, which led to the proposed adjustment.

Rejection of Aggregation Approach under TNMM:
The TPO rejected the aggregation approach under the Transactional Net Margin Method (TNMM) adopted by the assessee for benchmarking international transactions related to royalty and FTS. The TPO preferred the Comparable Uncontrolled Price (CUP) method for these transactions, leading to the proposed adjustment. The Dispute Resolution Panel (DRP) upheld this rejection, relying on the ITAT’s decision for the assessment year 2011-12, which supported the segregation of royalty and FTS transactions from other international transactions.

Assumption of Multiple-Year Data for TNMM Method:
The assessee contended that the TPO incorrectly assumed the use of multiple-year data for the TNMM method. The DRP did not address this issue explicitly, but the ITAT’s previous ruling indicated that the TPO’s approach was not proper.

Comparable Analysis under TNMM versus CUP Method:
The DRP upheld the TPO’s decision to use the CUP method instead of the TNMM for royalty and FTS payments. The DRP noted that the necessary comparable data was not provided by the assessee, making it difficult to apply the CUP method as suggested by the ITAT. The ITAT had previously rejected the TPO’s selection of comparables under CUP, but the DRP upheld the TPO’s approach due to the lack of new comparables from the assessee.

Rejection of Comparables in TP Study:
The TPO rejected seven out of nine comparables identified by the assessee under TNMM, assuming they did not incur expenditure on royalty/FTS. The DRP upheld this rejection, leaving only two comparables (Havells India Limited and Auto Meters Alliance Limited) that incurred similar expenditures.

Benchmarking Transactions of Royalty and FTS Payments under CUP Method:
The DRP confirmed the benchmarking of royalty and FTS payments under the CUP method, despite the assessee’s justification under TNMM. The DRP relied on the ITAT’s previous instructions but noted the absence of relevant comparable data provided by the assessee.

Charging of Interest under Section 234B:
The assessee also contested the AO’s decision to charge interest under section 234B. This issue was not explicitly addressed in the DRP’s order but was part of the grounds of appeal.

Conclusion:
The ITAT decided to remand the issue back to the AO/TPO for reconsideration, following the Hon’ble Delhi High Court’s judgment in the assessee’s own case for the assessment year 2011-12 and the case of Magneti Marelli Powertrain India Pvt. Ltd. The High Court emphasized that aggregation or segregation of transactions should be determined based on the facts of each case, and the appropriate method (TNMM or CUP) should be decided accordingly. The appeal was allowed for statistical purposes, and the AO/TPO was directed to reconsider the issue in light of the High Court’s guidance.

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