2023 (10) TMI 1057 - AT - Income Tax

ITAT overturns TPO's CUP method rejection, mandates TNMM with Berry ratio for transfer pricing benchmarking

The ITAT Delhi held that TNMM should be adopted as the most appropriate method for benchmarking transfer pricing transactions instead of CUP method, ... TP Adjustment - MAM selection - substantive adjustment made using the CUP Method pertaining AE’s other than Sumitomo Corporation, Japan - assessee use of Transactional Net Margin (“TNMM”) with operating profit/operating expenses (“OP/OPEX”) as the profit level indicator (“PLI”) has been disregarded by the TPO/DRP - HELD THAT:- It is found that in Assessee’s own case in the consolidated order [2018 (10) TMI 1785 - ITAT DELHI] and other connected Appeals, (Sumitomo Corporation India Ltd. Vs. ACIT [2018 (10) TMI 1785 - ITAT DELHI], the Coordinate Bench has held that owing to significant differences between the AE and non AE commission transactions in respect of the nature of the goods, volume of transaction and the geographical locations of the markets, average commission rate in the non-AE segment could not be adopted as the ALP for the commission rate of numerous products in the AE segment under CUP method, which warrants a very high degree of similarity between controlled and uncontrolled transactions. Thus we hold that once TNMM has been accepted under the similar FAR, there is no reason to deviate by adopting CUP Method and other methods admittedly are incapable of capturing the true arm's length result and therefore, we hold that TNMM should be taken as a most appropriate method for benchmarking the said transaction. Accordingly, we are inclined to allow the Grounds of Appeal No. 4, 6 & 7 for statistical purpose and remand the issue to the file of Ld. TPO to examine and bench mark the integration transaction by adopting as most appropriate method by taking ‘Berry ratio’ as PLI as has been approved by Hon’ble High Court. Protective addition under TNMM applying PLI of OP/OPEX - TPO while making the adjustment included the FOB value of the goods transacted under indenting segment in the cost base as well as part of opening revenues of the assessee - HELD THAT:- By respectfully following above said ratio laid down by the Tribunal in earlier years [2021 (11) TMI 1173 - ITAT DELHI] we are of the opinion that FOB value of the goods is the cost and revenue of the buyer and the seller and not the commission agent. Therefore, such an adjustment could not have been made. Comparable selection - assessee submitted that the assessee in TP report selected 8 comparable companies, but the TPO has rejected all the 8 comparables and selected fresh comparable set off 8 new Companies - HELD THAT:- Since, the assessee has provided the details of the above said 8 Companies in the TP Study; the Ld. TPO/DRP ought to have analyzed the same in detail. Likewise, the TPO/DRP ought to have given clear finding as to how the above 3 companies selected by the TPO are comparable to the FAR of the Assessee. Therefore, we deem it fit to direct the DRP to consider the above 8 Companies selected by the assessee along with the three comparable companies selected by the TPO on the basis of FAR analysis of the assessee and decide afresh by giving cogent reasons. DRP is further directed to pass a speaking order on those comparable after giving proper opportunity of being heard to the assessee. Issues Involved:1. Substantive addition of Rs. 21.69 crores using the CUP Method.2. Directions of the Ld. DRP regarding benchmarking of AE indent segment.3. Protective addition of Rs. 1.59 crores under TNMM.4. Comparables selected by the TPO.5. Addition of Rs. 1,59,18,332/- on a protective basis.6. Consequential issues regarding interest under sections 234B and 234C.Summary:1. Substantive Addition of Rs. 21.69 crores using the CUP Method:The assessee contested the TPO/DRP's disregard for the Transactional Net Margin Method (TNMM) with operating profit/operating expenses (OP/OPEX) as the profit level indicator (PLI) in favor of the Comparable Uncontrolled Price (CUP) method. The Tribunal noted that this issue had been consistently decided in favor of the assessee for the previous 10 years, where the CUP method was rejected, and TNMM was accepted as the most appropriate method. The Tribunal reiterated that significant differences between AE and non-AE transactions in terms of products, volume, and geographical locations invalidate the CUP method. Consequently, the Tribunal allowed the grounds of appeal related to this issue and remanded it to the TPO for examination using TNMM with Berry ratio as PLI.2. Directions of the Ld. DRP regarding Benchmarking of AE Indent Segment:The Tribunal addressed the ground concerning the DRP's directions to the AO/TPO to verify whether appeals were filed against the Tribunal's orders for AY 2012-13, 2013-14, or 2014-15. Since the Tribunal had already deleted the substantive adjustment, this ground was deemed academic and dismissed.3. Protective Addition of Rs. 1.59 crores under TNMM:The Tribunal examined the protective addition where the TPO included the FOB value of goods in the cost base and operating revenues. Citing previous decisions, the Tribunal held that the FOB value should not be added as it pertains to the buyer and seller, not the commission agent. Therefore, the Tribunal deleted the protective adjustment.4. Comparables Selected by the TPO:The Tribunal found the TPO's rejection of the assessee's comparables without detailed analysis erroneous. The TPO had rejected the comparables with a stereotyped reason that they failed the FAR filter. The Tribunal directed the DRP to reconsider the comparables provided by the assessee along with the TPO's selected comparables, providing detailed reasons and a speaking order after proper analysis.5. Addition of Rs. 1,59,18,332/- on a Protective Basis:Given the deletion of the protective adjustment, this ground was considered academic and required no adjudication.6. Consequential Issues Regarding Interest under Sections 234B and 234C:These issues were deemed consequential and required no separate adjudication.Conclusion:The appeal filed by the assessee was partly allowed for statistical purposes, and the stay application was rendered infructuous.