2026 (2) TMI 683 - AT - Income Tax

Transfer Pricing: direct transactional methods preferred; use TNMM only when reliable comparables for bundled rights and services are absent.

Where payments cover a bundle of proprietary marks, know how and business services charged at a consolidated rate, direct transactional methods (CUP) are ... TP adjustment - determining the ALP applying the traditional transaction method - Selection of comparable - HELD THAT:- After considering the nature and functions of the transactions involved, the bundle of transactions provided by Marks & Spencer, Singapore can be benchmark by adopting direct transactional method, the most appropriate method available in the Income Tax Rules is CUP method provided the TPO finds exact similar comparables. We are in agreement with the submissions of DR. At the same time, we observed that learned TPO had adopted and selected few comparables which are most probably Indian entities who are in manufacturing of the relevant products and also Germaine from Local market as well as local developer of brands in India. In short, the comparable selected are not proper. After considering the submissions of both the parties, in our considered view, there is justification in the submissions of the assessee that the comparable selected by the TPO are not proper. There are several companies/joint ventures engaged in India, who are also providing similar nature of trademarks along with other services to their Indian partners to execute their businesses. Therefore, we are inclined to remit this issue back to the file of AO/TPO to benchmark the payment of royalty transaction carried on by the assessee afresh after giving proper opportunity of being heard to assessee. Here, endeavour is to find the most appropriate method, in case, the TPO could not find exact similar comparables who also receives bundled services from their AE. In case, the TPO and assessee could not find such comparables, it is best to do the bench marking adopting the TNMM by finding proper comparables. In this case, the assessee also submitted the ‘TPAR’ before TPO. The TPO may consider the same and redo the bench marking afresh. In the result, appeal filed by the assessee is allowed for statistical purpose. We direct the AO/TPO to benchmark the transactions de novo as per our direction above after giving proper opportunity of being heard. Issues: (i) Whether the Transactional Net Margin Method (TNMM) applying aggregation of bundled rights and services is the most appropriate method for benchmarking the international transaction of payment for business services and license of proprietary marks; (ii) Whether the Comparable Uncontrolled Price (CUP) method and the comparables adopted by the Transfer Pricing Officer (TPO) are appropriate and whether the matter should be remitted for fresh benchmarking.Issue (i): Whether TNMM applied on an aggregated basis to the bundled royalty and business services is the most appropriate method.Analysis: The transactions consist of a bundle of rights and services (trademark, know-how, business-related services) charged at a consolidated rate of 6% of sales. Aggregation is permissible where transactions are inextricably linked and cannot be reliably tested separately. Traditional transaction methods are generally preferred for direct price comparison where reliable comparables exist. If exact comparables that receive similar bundled services cannot be identified, a reliable TNMM may be appropriate as an alternative.Conclusion: TNMM applied on an aggregated basis is a permissible and potentially appropriate method where bundled interrelated services cannot be reliably benchmarked by direct methods; however, direct transactional methods remain preferable if proper, directly comparable transactions are available.Issue (ii): Whether the CUP method and the specific comparables selected by the TPO are appropriate, and whether remand is required.Analysis: The TPO applied CUP as the most appropriate method but selected comparables drawn from available local data which, on scrutiny, suffer from deficiencies in comparability (nature of royalty, scope of services, and mix of multiple brands). Where CUP is to be applied, comparables must be truly comparable (including similarity of rights/services); if such comparables are not identified, reliance on CUP with inappropriate comparables is unsatisfactory. In such circumstances, it is appropriate to permit the revenue authorities to re-examine comparables and, if necessary, revisit benchmarking using TNMM with suitable comparables after affording the taxpayer opportunity to be heard.Conclusion: The CUP analysis as applied by the TPO is not sustained due to improper comparables; the matter is remitted to the Assessing Officer/TPO to re-benchmark the transaction afresh, giving the assessee opportunity to be heard and to allow the TPO to seek proper comparables or, if none are found, to apply TNMM with appropriate comparables.Final Conclusion: The appeal is allowed for statistical purposes and the transfer pricing issue is remitted to the AO/TPO for de novo benchmarking consistent with the preference for direct methods where reliable comparables exist and with allowance for TNMM where exact comparables for the bundled transaction cannot be found; the AO/TPO must give the assessee a proper opportunity to be heard.Ratio Decidendi: Where bundled rights and services are charged as a consolidated consideration, a direct transactional method (CUP) is preferred if truly comparable transactions (including comparable scope of rights/services) are available; if such comparables cannot be reliably identified, a properly conducted TNMM with suitable comparables is an acceptable alternative, and authorities must re-benchmark after affording the taxpayer an opportunity to be heard.