Tribunal rules in favor of assessee, rejects selective transfer pricing adjustments

The Tribunal ruled in favor of the assessee, directing the deletion of transfer pricing adjustments made using the Comparable Uncontrolled Price (CUP) method for international transactions with associated enterprises. The Tribunal found that applying two different methods for the same class of transactions and selectively adjusting transactions was incorrect. It held that the Transactional Net Margin Method (TNMM) was the appropriate benchmarking method for the majority of transactions, and the CUP method was not justified for the minimal portion of transactions. The appeals for different assessment years were allowed, emphasizing consistency in applying transfer pricing methods.

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Issues:
- Transfer pricing adjustment towards international transactions with associated enterprises (AEs) under TNMM and CUP methods.

Analysis:

Issue 1: Transfer Pricing Adjustment
- The appeals were filed against orders of Dispute Resolution Panel-2 and Commissioner of Income Tax (Appeals) for different assessment years, but with common grounds related to transfer pricing adjustments for international transactions with AEs.
- The key issue was the transfer pricing adjustment made using the Comparable Uncontrolled Price (CUP) method by the Transfer Pricing Officer (TPO) for a small percentage of transactions, despite accepting the Transactional Net Margin Method (TNMM) for the majority of transactions.
- The TPO's adjustment was challenged by the assessee before the DRP, arguing that applying CUP method for a minimal portion of transactions was unjustified.
- The DRP upheld the TPO's adjustment, citing a previous ITAT decision for the AY 2009-10 where external comparables were furnished for CUP method, leading to the rejection of the assessee's arguments.
- The matter was further appealed, with the High Court remanding it back to the Tribunal to decide the appropriate benchmarking method without sending it back to the TPO.
- The Tribunal considered the arguments of both parties, emphasizing that applying two methods for the same class of transactions and cherry-picking transactions for adjustment was incorrect.
- Citing precedents, including the ITAT Pune Bench and Bombay High Court decisions, the Tribunal concluded that the TPO erred in applying the CUP method for a few transactions while accepting TNMM for the majority.
- Consequently, the Tribunal directed the AO/TPO to delete the transfer pricing adjustments made using the CUP method, as it was not the most appropriate method for the transactions.

Issue 2: Appeal for AY 2002-03
- The facts and issues in the appeal for AY 2002-03 mirrored those in the appeal for AY 2011-12, leading to a similar decision to delete the transfer pricing adjustments made using the CUP method.
- The Tribunal pronounced the order in Chennai, allowing the appeals for both assessment years on 12th August 2022.

This detailed analysis outlines the key issues, arguments, decisions, and legal principles involved in the judgment regarding transfer pricing adjustments for international transactions with associated enterprises under TNMM and CUP methods.

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