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, following precedent from connected appeals. The TPO's rejection of assessee's TNMM approach using OP/OPEX as PLI was overturned. The matter was remanded to TPO to benchmark using Berry ratio as PLI. Regarding protective addition under TNMM, the Tribunal ruled that FOB value of goods cannot be included in cost base as it belongs to buyer/seller, not commission agent. The case was also remanded to DRP to reconsider comparable selection, requiring analysis of both assessee's 8 comparables and TPO's 3 selected companies with proper FAR analysis and speaking order.

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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.

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