2018 (11) TMI 862 - AT - Income Tax

Tribunal overturns TP adjustments, stresses method consistency, rejects arbitrary estimations 'sLengthPrice

The Tribunal allowed the appeal of the assessee, deleting the Transfer Pricing (TP) adjustments made by the Transfer Pricing Officer (TPO) for the export ... TPA - ALP determination - selection of MAM - application of CUP method - allocation of software cost - Held that:- This issue squarely covered by Tribunal decision in assessee’s group company in case of Firmenich Aromatics India Pvt.Ltd Vs Dy. CIT [2018 (9) TMI 1007 - ITAT MUMBAI] the material submitted before us, which also forms part of the Transfer Pricing Officer's record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee's share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the Transfer Pricing Officer did not agree to the arm's length price shown by the assessee it was open for him to determine the arm's length price by applying one of the most appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm's length price on ad-hoc / estimation basis. Thus we delete the adjustment made to the arm's length price of payment made towards availing information system services from AE - decided in favour of assessee. Issues Involved:1. Transfer Pricing (TP) adjustment in relation to export of goods.2. TP adjustment in relation to availing of Information Systems (IS) services.Issue-wise Detailed Analysis:1. Transfer Pricing (TP) adjustment in relation to export of goods:The first issue concerns the determination of the Arm’s Length Price (ALP) for the international transaction of exporting finished goods. The Dispute Resolution Panel (DRP) upheld the action of the Assessing Officer (AO)/Transfer Pricing Officer (TPO) in making a TP adjustment of INR 141,13,97,695. The assessee argued against the use of the Comparable Uncontrolled Price (CUP) method by the TPO, citing differences in geographical markets, volume of transactions, and functional profiles. The assessee preferred the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM).The assessee is engaged in manufacturing aromatic ingredients and entered into various international transactions, including the export of finished products worth INR 446.18 crores. The TPO compared the prices of products sold to group companies (AEs) with those sold to domestic third parties (non-AEs) using the CUP method. The assessee contended that the transactions with AEs and non-AEs were not comparable due to significant differences in market levels, functional and risk profiles, transaction volumes, and geographical markets.The Tribunal noted that the TPO's application of two different methods (CUP and TNMM) for interconnected transactions was incorrect. The Tribunal emphasized that all transactions of a similar nature should be benchmarked using the same method. The Tribunal also highlighted that the CUP method was not the most appropriate method due to the significant differences in market conditions, volumes, and geographical locations.The Tribunal referred to the decision in the case of M/s. Amphenol Interconnect India Pvt. Ltd., where it was held that the TNMM was the most appropriate method for determining the ALP due to the customized nature of the goods and the differences in geography, volume, timing, risk, and function. The Tribunal, following this precedent, deleted the TP adjustment made by the TPO and allowed the assessee's appeal on this issue.2. TP adjustment in relation to availing of Information Systems (IS) services:The second issue concerns the determination of the ALP for the international transaction of payment for IS services. The DRP upheld the action of the AO/TPO in determining the ALP at INR 1,62,05,000 instead of INR 11,50,31,934, resulting in a TP adjustment of INR 9,88,26,934. The assessee argued that the TPO disregarded the evidences submitted, challenged the commercial rationale, and arbitrarily estimated the ALP without following any prescribed method.The assessee had entered into an 'Information Systems Service Agreement' for implementing S3-ERP software and availing related services from its AE. The TPO, relying on the previous year's order, estimated the ALP based on man hours and salary, which the Tribunal found to be without any supporting material or comparable data.The Tribunal referred to its decision in the case of Firmenich Aromatics India Pvt. Ltd., where it was held that the TPO's estimation of the ALP without any supporting material and not following the prescribed methods was incorrect. The Tribunal emphasized that the TPO should determine the ALP by following one of the most appropriate methods prescribed under the statute and not on an ad-hoc/estimation basis.Following the precedent, the Tribunal deleted the TP adjustment made by the TPO for the IS services and allowed the assessee's appeal on this issue.Conclusion:The Tribunal allowed the appeal of the assessee on both issues, deleting the TP adjustments made by the TPO for the export of finished goods and the payment for IS services. The Tribunal emphasized the need for consistency in applying the most appropriate method for determining the ALP and rejected the use of arbitrary estimations by the TPO.