TaxTMI 
TaxTMI 
2024 (10) TMI 1283
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...., for the assessment year (hereafter AY) 2016-17. The assessee was aggrieved by the enhancement of its total income by a sum of Rs. 3,61,32,20,620/- on account of transfer pricing adjustment in terms of the order passed by the Transfer Pricing Officer (TPO). The assessee's appeal was allowed by the Tribunal. 3. The assessee had filed its return of income on 25.11.2016 in respect of AY 2016-17 declaring a total income of Rs. 77,82,14,150/-. The said return was picked up for scrutiny and a notice was issued under Section 143 (2) of the Act. The assessee had during the year in question entered into international transactions with its Associated Enterprises (AEs) and accordingly, the assessee's case was referred by the Assessing Officer (AO) to the TPO for examining whether the international transactions between the assessee and AEs were on an arm's length basis. 4. The assessee furnished its transfer pricing studies to the TPO. The assessee had adopted the transactional net margin method (TNMM) to benchmark its international transactions. However, the said studies were rejected. The TPO held that the TNMM was not an appropriate method to benchmark the international transactions ....
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....ere considered as inextricably linked to the activities carried out by the assessee and therefore, no separate benchmarking study was undertaken. 10. The assessee had selected TNMM as the most appropriate method and had used the ratio of Operating Profits/Value Added Expenses (OP/VAE) and Gross Profit/Value Added Expenses (GP/VAE) as the profit linked indicators (PLI) to benchmark the international transactions. On the basis of certain comparables found as the comparable entities, the assessee had submitted its analysis as under: PLI Tested party's operating margin Comparable companies average (without working capital adjustment) Comparable companies average (after working capital adjustment) OP/VAE 369.39% 25.13% -23.08% GP/VAE 469.39% 125.13% 76.92% 11. The assessee had also furnished its agreements with AEs and had disclosed the fees received as percentage of sales for various products as under: (a) All Chemical Products 0.9% (b) Plastic Products 2.0% (c) PVC 1.5% (d) All fertilizer product 0.5% of the consideration collected from the customers. 12. The TPO conducted a search of the available data b....
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....he median rate of commission computed at 5%, the TPO determined the upward adjustment of Rs. 3,61,32,20,620/- under Section 92CA of the Act. The computation as set out in the order dated 29.10.2019 passed by the TPO is reproduced below: "Particulars Amount (INR) Sales generated by the AEs in India [A] 89,84,87,07,000/- Arm's length rate of commission (%) [B] 5.00% Commission income at ALP [C=A*B] 4,49,24,35,350/- Commission income of taxpayer [D] 87,92,14,730/- Adjustment u/s 92CA [E=C-D] 3,61,32,20,620/-" 16. Based on the order dated 29.10.2019 passed by the TPO, the AO framed a draft assessment order, which was appealed by the assessee before the Dispute Resolution Panel (DRP). The assessee assailed the decision of the TPO to reject TNMM and adopt another method. Additionally, the assessee also assailed the comparables as selected by the TPO on the ground that the same did not meet the comparability criteria. The DRP did not find any fault with the decision of the TPO in rejecting the TNMM and held that the TPO had furnished sufficient reasons justifying the application of the other method as provided under Rule 10AB of the Rules. Inso....
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....vely in cases where the value of goods had no role to play in the profits earned by the assessee and the same was directly linked with the operating expenditure incurred by the assessee. This Court had also pointed out that in case where the assessee used intangibles as a part of business or other valuable fixed assets, Berry ratio would not be an apposite PLI as the value of tangibles as well as the value added by substantial fixed assets would not be captured in the operating cost. 21. In Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax (supra), the Court considered a case where the assessee had received service charges of 5% of cost plus markup for providing buying services for sourcing garments, handicrafts, leather products in India for its AE. In the said case, the Court upheld the use of TNMM as the most appropriate method and further held that "once the transactional net margin method was deemed the most appropriate method, the distortions, if any, had to be addressed within its framework". 22. The Tribunal also referred to the Guidelines issued by the Institute of Chartered Accountants of India (ICAI) in support of the conclusion that it would be necessary for....
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....ties. 26. As noted above, the principal controversy relates to the decision of the TPO to reject the TNMM with Berry ratio (GP/VAE - gross profit/value added expenses) as the most appropriate method for determining the ALP. Admittedly, the TNMM had been followed for determining the adjustments, if any, under Section 92CA of the Act for the AY 2009-10 to 2014-15. Thus, the TNMM, which had been followed earlier, could not have been rejected by the TPO without any substantial reason. 27. In M/s Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC), the Supreme Court had observed as under: "11. One of the contentions which the learned senior counsel for the assessee-appellant raised at the hearing was that in the absence of any change in the circumstances, the Revenue should have felt bound by the previous decisions and no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras High Court considered this question in T.M.M. Sankaralinga Nadar & Bros. v. CIT 4 ITC 226. After dealing with the contention the Full Bench expressed the following opinion: "The principle....
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....t year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 14. On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12." 28. There is no cavil that the assessment in respect of each assessment year is a separate proceeding/case and therefore, the prin....
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.... if none of the other methods were considered as most appropriate. Rule 10B (1) of the Rules sets out various methods, which may be chosen as the most appropriate method for determining the ALP in relation to international transactions. Clause (f) of Rule 10B (1) of the Rules also includes 'any other method' as may be provided under Rule 10AB of the Rules. Rule 10AB of the Rules contemplates a method, which takes into account "the price, which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non associated enterprises, under similar circumstances, considering all relevant facts". Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only if none of the other methods are considered as the most appropriate method. However, as noted above, the TPO had provided no reasons for rejecting TNMM, which had been used in earlier years. The TPO had also not discussed the applicability of any....
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....ary to justify and document reasons for rejection of all other five methods while selecting the 'Other Method' as the most appropriate method. The OECD Guidelines also permit the use of any other method and state that the taxpayer retain the freedom to apply methods not described in OECD Guidelines to establish prices, provided those prices satisfy the arm's length principle." 34. It is difficult to accept that a business model that entails providing marketing support on commission basis is not unique or one that would warrant rejecting the TNMM. 35. The assessee had also objected to the comparables used by the TPO for determining the ALP. The DRP had allowed the objections in respect of some of the comparable entities but had rejected the assessee's objections in respect of the others. The Tribunal had also found that the TPO had used certain comparable entities as included by the TPO and accepted by the DRP related to payment of a royalty pertaining to know-how, patent and process technology, which could not be accepted. The Tribunal also found that the findings of the DRP in case of a comparable as conflicting. The Tribunal noted that for one of the comparables (L17961....