Tribunal selects CUP method for ALP in international transactions, allows multiple-year data

The tribunal concluded that the Comparable Uncontrolled Price (CUP) method was the most appropriate for determining the Arm's Length Price (ALP) of international transactions due to the absence of a profit element. The tribunal directed the Transfer Pricing Officer (TPO) to use the CUP method and allow multiple-year data for comparables. The appeal was allowed for statistical purposes. The order was pronounced on 29.09.2015.

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Issues Involved:
1. Determination of the most appropriate method for computing the Arm’s Length Price (ALP) between Comparable Uncontrolled Price (CUP) method and Transactional Net Margin Method (TNMM).
2. Admissibility of additional grounds of appeal regarding the adoption of CUP method.
3. Appropriateness of TNMM in the absence of profit element in international transactions.
4. Comparison of the assessee's first-year operations with established companies.
5. Transfer Pricing Officer's (TPO) rejection of comparables and substitution with new ones.
6. Whether the assessee can shift from TNMM to CUP method at the appellate stage.

Detailed Analysis:

1. Determination of the Most Appropriate Method:
The central issue in this appeal was whether the CUP method or TNMM was the most appropriate method for determining the ALP of the international transactions undertaken by the assessee. The assessee initially adopted the CUP method in its Form 3CEB filed along with the return of income but later shifted to TNMM during the assessment proceedings. The TPO, however, determined the ALP using TNMM, leading to an upward adjustment.

2. Admissibility of Additional Grounds of Appeal:
The assessee filed additional grounds of appeal seeking to revert to the CUP method. The tribunal admitted these grounds, emphasizing that they involved a legal issue that went to the root of the matter. The tribunal cited the Supreme Court decision in NTPC Ltd vs CIT, which allows for the admission of new grounds if they are already part of the record and essential for deciding the issue.

3. Appropriateness of TNMM in the Absence of Profit Element:
The tribunal agreed with the assessee's argument that TNMM might not be appropriate when there is no profit element in the international transactions, such as reimbursement of expenses on a cost-to-cost basis. The tribunal noted that TNMM compares the profits of various comparables, which is not suitable when the transactions do not involve a profit element.

4. Comparison with Established Companies:
The tribunal acknowledged that the comparables chosen by the TPO were established companies with an average existence of 22 years, while the assessee was in its first year of operation. This disparity in experience and operational duration was significant, as the assessee had to incur substantial initial expenses, with revenue expected to flow in later years. The tribunal referenced the Pune Tribunal's decision in Skoda Auto India P Ltd vs ACIT, which highlighted the need for adjustments when comparing start-up operations with established companies.

5. TPO's Rejection of Comparables:
The TPO rejected two of the eleven comparables chosen by the assessee and substituted them with new ones, resulting in an upward adjustment of the ALP. The tribunal found that the TPO's approach was flawed, as the comparables were not functionally similar to the assessee's operations.

6. Shifting from TNMM to CUP Method at the Appellate Stage:
The tribunal held that the assessee could shift from TNMM to CUP method at the appellate stage if it demonstrated that CUP was more appropriate for determining the ALP. The tribunal referenced the Mumbai Tribunal's decision in Mattel Toys (I) (P) Ltd vs DCIT, which allowed for a change in the method if it resulted in a more accurate determination of the ALP.

Conclusion:
The tribunal concluded that the CUP method was the most appropriate method for determining the ALP of the international transactions, given the absence of a profit element in the reimbursements. The tribunal set aside the issue to the file of the TPO/AO with directions to adopt the CUP method and permit the use of multiple-year data for comparables. The appeal was allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the court on 29.09.2015.

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