2016 (4) TMI 803 - AT - Income Tax

Tribunal Upholds RPM for ALP in International Transactions: Precedent & TPO Acceptance

The Tribunal upheld the decision of the ld. CIT(A) to adopt the Resale Price Method (RPM) over the Transactional Net Margin Method (TNMM) for determining ... Resale Price Method - Transactional Net Margin Method - Most Appropriate Method - Arm's Length Price - comparability and benchmarking in transfer pricing - precedential value of subsequent-year transfer pricing findingResale Price Method - Transactional Net Margin Method - Most Appropriate Method - Arm's Length Price - precedential value of subsequent-year transfer pricing finding - Admissibility and correctness of directing adoption of RPM as the Most Appropriate Method for benchmarking the trading segment (import of industrial automation products and sales commission) for AY 2008-09. - HELD THAT: - The Assessing Officer/TPO applied TNMM and made an addition by rejecting the assessee's adoption of RPM for the trading transactions. The CIT(A) examined the competing contentions, considered timing differences and the availability of data, and noted that for the subsequent year (AY 2009-10) the TPO himself had accepted RPM as the MAM for the trading segment on substantially similar facts. The Tribunal found no infirmity in the CIT(A)'s approach of directing the AO to adopt RPM for determining the ALP in respect of the trading transactions for AY 2008-09. The Tribunal accepted the CIT(A)'s reliance on the subsequent-year acceptance of RPM as persuasive and consistent with the comparative/benchmarking exercise, and observed that on the similar facts and circumstances the conclusion to adopt RPM was justified. The Tribunal therefore upheld the CIT(A)'s order displacing the TPO's TNMM-based adjustment.The CIT(A)'s direction to adopt RPM for working out the ALP of the trading transactions for AY 2008-09 is upheld and the revenue's grounds are dismissed.Final Conclusion: The appeal filed by the Revenue is dismissed and the CIT(A)'s order directing adoption of RPM for the trading segment for AY 2008-09 is affirmed. Issues:1. Selection of appropriate method for determining the Arm's Length Price (ALP) in international transactions.2. Application of Resale Price Method (RPM) vs. Transactional Net Margin Method (TNMM) for benchmarking the transactions.3. Discrepancy in determining ALP for import of industrial automation products.Analysis:Issue 1: Selection of appropriate method for determining ALPThe Revenue appealed against the order of the ld. CIT(A)-II, Dehradun, challenging the direction to adopt RPM for working out the value of transactions with related parties. The Revenue contended that TNMM should be used as the most appropriate method. The ld. CIT(A) allowed the appeal in favor of the assessee, citing the precedent of adopting RPM in a similar case for AY 2009-10. The Revenue further appealed the decision.Issue 2: Application of RPM vs. TNMM for benchmarking transactionsThe assessee used TNMM for purchase of raw materials and export of finished goods, while RPM was applied for import of industrial automation products and sales commission. The TPO determined the ALP for industrial automation products using TNMM, rejecting the RPM applied by the assessee. The ld. CIT(A) supported the use of RPM based on the precedent of a similar case for AY 2009-10.Issue 3: Discrepancy in determining ALP for import of industrial automation productsThe TPO rejected the RPM used by the assessee and proposed an adjustment for import of industrial automation products. The ld. CIT(A) directed the adoption of RPM for calculating the ALP, considering the TPO's acceptance of RPM in a subsequent year. The Revenue challenged this decision, arguing for TNMM as the most appropriate method.The Tribunal upheld the findings of the ld. CIT(A), noting the acceptance of RPM by the TPO in a similar case for the subsequent year. The Tribunal dismissed the Revenue's appeal, affirming the use of RPM as the most appropriate method for determining the ALP in the trading segment.