2020 (10) TMI 419 - HC - Income Tax

Tribunal favors CUP method over TNMM for Transfer Pricing Adjustments under Income Tax Act

The Tribunal held that the Comparable Uncontrolled Price (CUP) method was more appropriate than the Transactional Net Margin Method (TNMM) for Transfer ... TP Adjustment - MAM selection - CUP OR TNMM - Matter was remanded back by the ITAT - HELD THAT:- As decided in own case [2016 (11) TMI 1660 - ITAT CHENNAI] and [2020 (9) TMI 1054 - MADRAS HIGH COURT] matter of some time to be granted by the Tribunal to direct both the sides to adduce such evidence from the public domain available for comparison, to decide as to which is the most appropriate method to be adopted looking to the nature of business etc. as in Section 92C - Of course, the mathematical computation work could have been left to the Adjudicating Authorities below, or done by the Tribunal itself with the assistance of Counsels/Assessees etc. As far as the appropriateness of the method to be adopted for TP adjustments was required to be done, in our considered opinion, the Tribunal should not have remanded the matter back to the authorities below and that too to the two different authorities, viz., Dispute Resolution Panel and CIT (Appeals), in previous order, and that too by committing a mistake of misreading of the previous order dated 21.12.2012 and holding that CUP Method was already decided to be the only appropriate method, whereas the Assessee has been contending otherwise throughout, and is aggrieved by the adoption of the CUP method and was pressing of TNM Method. Assessee is again in the second round of appeals before the learned Tribunal against the orders passed by the authorities below on the remand made by the previous order dated 21.12.2012. As expected of the learned Tribunal also to realize the consequences of an open remand made or a remand made to the authorities below only for re-computation with the appropriateness of the method decided finally at its own end. The multiplicity of the litigation and rounds of appeal, what we have described as a shuttle game, should have been seen by the learned Tribunal and therefore, we expect at least from now on, the learned Tribunal will decide on the issue of the appropriateness of the method for TP adjustments, while deciding all the pending appeals before it, as far as this Assessee is concerned and also other Assessee by recording its own reasons and taking into account the relevant evidence and materials on record, and if necessary, by calling additional evidence before it, with regard to the external comparables, from both the sides. We do not expect a further open remand by the learned Tribunal on the said issue any more because such decision of the learned Tribunal is likely to affect not only the years under consideration before the learned Tribunal but also the future assessment years, as the Assessee continues to remain in the same business for such future years also. Issues Involved:1. Appropriateness of the Transfer Pricing Method (TNMM vs. CUP) for computing the arm's length price.2. Validity of the application of the CUP method considering geographical market differences.3. Availability of comparative data for the application of the CUP method.4. Jurisdiction of the TPO in questioning commercial expediency and business conduct.5. Allowability of commission expenditure as business expenditure.Detailed Analysis:1. Appropriateness of the Transfer Pricing Method (TNMM vs. CUP) for computing the arm's length price:The Tribunal held that the CUP method (Comparable Uncontrolled Price Method) was more appropriate than the TNMM (Transactional Net Margin Method) for making Transfer Pricing Adjustments (TP Adjustments) under Section 92C of the Income Tax Act. The Tribunal's decision was based on the availability of internal comparables for certain items sold to the Associated Enterprise (AE). The Tribunal noted that for 49 types of threads, internal comparables were available, which justified the use of the CUP method over the TNMM. The Tribunal also emphasized that the negative adjustments for certain items should not be ignored when computing the arm's length price.2. Validity of the application of the CUP method considering geographical market differences:The Tribunal found that the geographical differences between the sales to AE and non-AE were not significant enough to warrant a different method. The Tribunal noted that the assessee was catering to Asian countries, and the associated enterprises were located in Sri Lanka, Mauritius, Pakistan, and Egypt, while non-associated enterprises were located in Sri Lanka, Bangladesh, and Malawi. The Tribunal concluded that there was not much geographical difference to affect the choice of the CUP method.3. Availability of comparative data for the application of the CUP method:The Tribunal observed that the assessee failed to provide external comparables despite being given the opportunity. The Tribunal emphasized that the assessee's inability to furnish external comparables was noted by the DRP (Dispute Resolution Panel). The Tribunal concluded that the lack of external comparables did not affect the appropriateness of the CUP method, as internal comparables were available for certain items.4. Jurisdiction of the TPO in questioning commercial expediency and business conduct:The Tribunal held that the TPO (Transfer Pricing Officer) has the jurisdiction to question the commercial expediency of the expenditure incurred by the assessee. The Tribunal referred to the Delhi High Court's judgment in the case of M/s. EKL Appliances Ltd., which stated that legitimate business needs should be understood from the point of view of a prudent businessman. However, the Tribunal emphasized that the assessee must demonstrate the business purpose for which the payments were made. The Tribunal found that the assessee failed to show the agency services rendered by M/s. The Central Agency, leading to the conclusion that the arms-length price could be taken as nil.5. Allowability of commission expenditure as business expenditure:The Tribunal disallowed the commission expenditure paid to M/s. The Central Agency on the grounds that there was no evidence of actual agency services rendered. The Tribunal noted that the invoices raised by M/s. The Central Agency were based on the net value of the order, but there was no discernible evidence of procurement of orders by the agency. The Tribunal concluded that the assessee failed to demonstrate the services received from the agency, and therefore, the commission expenditure could not be allowed as business expenditure.Conclusion:The Tribunal's decision emphasized the appropriateness of the CUP method over the TNMM for certain transactions, the need for the assessee to provide comparative data, and the jurisdiction of the TPO in questioning commercial expenditures. The Tribunal also highlighted the importance of demonstrating the business purpose for expenses to be allowed as business expenditure. The matter was remanded back to the lower authorities for recalculating the arm's length price and re-evaluating the commission expenditure, with a directive to expedite the process.