CUP method upheld where valid internal CUP exists; TNMM preference doesn't justify rejecting assessee's analysis under Section 92C

ITAT MUMBAI - AT held that CUP was the most appropriate method for benchmarking the international provision of support/broker services where a valid internal CUP (charter rates paid to third parties) existed; the Transfer Pricing Officer's mere preference for TNMM did not justify rejecting the assessee's CUP analysis. The tribunal excluded an unsuitable comparable (a trading/digital-certificate company) and found that on exclusion the assessee's margin fell within tolerance, so the transfer pricing adjustment and resulting addition were deleted.

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Issues Involved:
1. Transfer pricing adjustment related to international transactions involving provision of support/broker services to an overseas Associated Enterprise (AE).
2. Applicability of Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) method for benchmarking the transaction.
3. Selection of comparables under TNMM.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the appeals is the addition sustained/deleted on account of transfer pricing adjustment related to the international transaction involving provision of support/broker services to the overseas AE, Essar Steel Minnesota LLC (ESML). The assessee, engaged in logistic services, provided ship broker services to ESML by hiring vessels on a voyage charter basis from third parties and providing them to ESML on a back-to-back basis. The Transfer Pricing Officer (TPO) observed that the assessee assisted ESML in availing six vessels on a voyage charter basis and received revenue of Rs. 29,17,78,711 for these services.

2. Applicability of TNMM vs. CUP Method:
The assessee initially benchmarked the transaction using the TNMM with Operating Profit to Total Cost (OP/TC) as the profit level indicator (PLI), selecting five comparables with an average margin of 7.93%, while the assessee's margin was 9.96%. The assessee also provided an alternative benchmarking using the CUP method, comparing the price charged by third-party vendors for hiring vessels as an internal CUP. The TPO rejected the CUP method, stating that the assessee itself had not considered it the most appropriate method in its transfer pricing study report. The TPO accepted TNMM but disagreed with the computation of margins based on multiple-year data, leading to an upward adjustment of Rs. 3,07,66,604.

3. Selection of Comparables Under TNMM:
The Commissioner of Income Tax (Appeals) [CIT(A)] removed one comparable (Inmacs Management Service Ltd.) and recalculated the arithmetic mean of the remaining comparables at 16.56%, resulting in a revised adjustment of Rs. 1,75,25,130. Both the assessee and the Revenue appealed this decision.

Revenue’s Appeal:
The Revenue's appeal focused on the exclusion of Inmacs Management Service Ltd. as a comparable. The Tribunal dismissed this appeal as the tax effect was below the revised monetary limit of Rs. 50 lakh as per CBDT Circular no.17/2019.

Assessee’s Appeal:
The assessee challenged the application of TNMM over CUP. The assessee argued that the terms and conditions for hiring vessels from third parties and providing them to the AE were similar, making CUP the most appropriate method. The Tribunal agreed, noting that CUP is a more direct method and that the internal CUP provided by the assessee was valid. The Tribunal also observed that in previous and subsequent assessment years, the TPO had accepted CUP as the most appropriate method for similar transactions. Consequently, the Tribunal held that CUP should be applied, and no further adjustment was necessary.

Selection of Comparables:
The assessee also contested the inclusion of three comparables under TNMM: Axis Integrated Systems Ltd., Cyber Media Research Ltd., and Adecco India Pvt. Ltd. The Tribunal excluded Axis Integrated Systems Ltd., finding it functionally different and lacking financial statements in the public domain. The exclusion of this comparable brought the assessee's margin within the tolerance range of the remaining comparables, making further adjustment unnecessary. The Tribunal did not address the comparability of Cyber Media and Adecco India Pvt. Ltd. due to the resolution of the primary issue.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, holding that CUP is the most appropriate method for benchmarking the transaction and deleting the addition made on account of transfer pricing adjustment. The Tribunal also criticized the CIT(A) for not addressing the CUP issue adequately. The order was pronounced in the open Court on 19.11.2019.

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