TPO must properly justify transfer pricing method selection under section 92C, cannot use unverified data

The Principal Commissioner of Income Tax-4 Versus Phoenix Comtrade Pvt. Ltd.

The Principal Commissioner of Income Tax-4 Versus Phoenix Comtrade Pvt. Ltd. - TMI Issues Involved:
1. Appropriateness of Transfer Pricing Methods (TNMM vs. CUP)
2. Reliability and Acceptance of Data Sources (Bloomberg Database vs. Indian Custom's Rates)
3. Proportional Adjustments in Pricing (Kcal Value of Coal)

Summary:

Issue 1: Appropriateness of Transfer Pricing Methods (TNMM vs. CUP)

In Income Tax Appeal (IT) No. 1188 of 2018, the appellant challenged the ITAT's decision favoring the Assessee's use of the Transactional Net Margin Method (TNMM) over the Transfer Pricing Officer's (TPO) preference for the Comparable Uncontrolled Price (CUP) method for determining the Arms Length Price (ALP) of rice exports. The ITAT concluded that the TNMM was more appropriate and the TPO's one-to-one comparison was not suitable. The ITAT directed the Assessing Officer (AO) to delete the addition made on account of TP adjustment.

Issue 2: Reliability and Acceptance of Data Sources (Bloomberg Database vs. Indian Custom's Rates)

The TPO used the Bloomberg database to ascertain the export prices of rice, which the Assessee contested, suggesting that the Indian Custom's rates would be more reliable. The ITAT noted that the TPO failed to justify the preference for the Bloomberg data and did not address the Assessee's objections adequately. The ITAT found that the TPO did not provide a detailed explanation for rejecting the TNMM and relying solely on the Bloomberg database. The ITAT accepted the Assessee's contention that the Bloomberg database was not reliable and that the Assessee's export prices were at ALP even under the CUP method.

Issue 3: Proportional Adjustments in Pricing (Kcal Value of Coal)

In Income Tax Appeal (IT) No. 1204 of 2018, the Assessee used the CUP method for benchmarking the import transactions of minerals. The TPO rejected this method citing discrepancies in the quality and calorific value of coal. The ITAT examined the TPO's reasons and found them unsubstantiated. The ITAT accepted the Assessee's method of proportional adjustment based on calorific value (Kcal) and noted that the TPO's adverse inferences were drawn without proper analysis. The ITAT upheld that the Assessee's method was scientifically calculated and rejected the TPO's reasons for rejecting the CUP method for both coal and manganese imports.

Conclusion:

The High Court found no substantial questions of law in both appeals, upholding the ITAT's decisions. The appeals were dismissed, affirming the ITAT's acceptance of the TNMM and the Assessee's proportional adjustments in pricing.