TaxTMI 
TaxTMI 
2025 (6) TMI 2001
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....g the financial year 2020-21, ASPL entered into specified domestic transactions for purchase of potatoes from HAPL. As per the Supply Agreement between ASPL and HAPL, the AE sells potatoes to ASPL at cost plus Arm's Length markup and AE is required to sell to third parties only when surplus stock exists. The Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price [CUP] method as the Most Appropriate Method (MAM) and made an upward adjustment of Rs.15.99 crores, by comparing prices charged by the AE to ASPL and to third parties, without any quality or volume adjustments as per Rule 10B(1)(a)(ii) of the IT Rules. The assessee contends that Transaction Net Margin Method (TNMM) should have been adopted instead and disputed the comparability of transactions used by the Ld TPO. On filing objection before Dispute Resolution Panel, the Ld DRP upheld the upward adjustment made by TPO and dismissed the objection filed by the assessee. Consequently, the Assessment Unit passed the final assessment order assessing the total income at Rs. 39,95,80,674/= and demanded tax thereon. 3. Aggrieved against the Final Assessment order the assessee is in appeal before us raising the fo....
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.... of the case, the learned AO / Hon'ble DRP erred in not accepting the alternative benchmarking method by treating MAM as Transaction Net Margin Method ("TNMM") and by taking AE as testing party based on the nature of business and availability of reliable comparables though AE is least complex and does not own intangibles. 1.7 On facts and circumstances of the case, the learned AO/Hon'ble DRP failed to appreciate the fact that the net margin of the AE works out to 5.86% (and not 2.64%) and that the net margin of AE is higher than the margins earned by comparable companies (i.e., 2.44% based on prowess database and range of 1.19% to 2.08% based on Capitaline and ACE TP database). Accordingly, the transaction met the arm's length test. 1.8. Without prejudice to above, the learned AO / Hon'ble DRP has erred in not considering the margins of Appellant and the comparable company and consequently, failed to appreciate that provisions of specified domestic transactions on the facts of the case are applicable only when the eligible unit i.e., ASPL makes more than ordinary profits under section 80-IB(13). 2. Ground No. 2 - Erred in computation of de....
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....refore comparability could not be conclusively challenged. * The AE was not a mere trader but played an active role in procurement and sales and hence was not the right tested party. 5.1. Ld. CIT-DR relied on the following case laws: (i) CIT Vs. Cargill Food India Ltd. [2017] 88 taxmann.com 470 (Delhi) (ii) Malco Energy Ltd. Vs.ACIT [2023] 155 taxmann.com 32 (Mumbai Trib.) 6. We have carefully considered the rival submissions, perused the orders passed by the lower authorities and examined the material on record. The assessee/ASPL is engaged in the business of processing of potatoes for manufacturing of frozen french fries and allied products. The Assessee uses processing category of potatoes for production of varieties of french fries and chips which has higher solid content and longer in length suitable for manufacturing french fries. Since the assessee is engaged in the business of processing vegetables (i.e. potatoes), it is eligible for deduction under section 80-IB of the Act. Whereas M/s. Hyfun Agrilink Private Limited (HAPL) is a wholly owned subsidiary of the assessee and HAPL is regarded as AE as per section 92BA of the Act, read with Rule....
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....ere is no estoppel in transfer pricing method selection, if the new method leads to a more reliable determination of Arm's Length Price by observing as follows: "1. CAN ASSESSEE RESILE FROM THE MOST APPROPRIATE METHOD ADOPTED IN ITS T.P.S.R. ? 33.1 The assessee adopted the 'Other method' as the most appropriate method as per its Transfer Pricing Study Report. Then it advocated for the CUP as the most appropriate method in front of the TPO. Before the Tribunal also, the ld. AR heavily banked upon the CUP method to demonstrate that the international transaction was at ALP. This was opposed tooth and nail by the Id. DR contending that a method once chosen as the most appropriate in its TPSR cannot be changed by the assessee in further proceedings, much less the Tribunal for the first time. We need to examine if an assessee is entitled to switch over to a new method, different from the one taken in TPSR, as the most appropriate method? 33.2 Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C dealing with computation of ALP provides through s....
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....er realizes, during the course of the proceedings, that the method applied by it was not the most appropriate having regard to the nature and class of transactions etc., he can also back-out from the method earlier selected provided the new method is actually the most appropriate having regard to the nature of the transaction under consideration. In both the scenarios, viz., where either the TPO rejects the assessee's selection of the method or the assessee itself its mistake in the selection of the hierarchy to examine the correctness of the newly selected method as the most appropriate in the facts and circumstances of the case. If the Tribunal holds that the change in the method by the TPO or the assessee resiling from its earlier selection is correct, then there can be no impediment in switching over to the new method because the legislature stipulates that the most appropriate method shall be applied for determining the ALP. The point to be noted is the selection of actual most appropriate method in the facts of the case is essential and not the perception of the assessee or the TPO to this effect. It thus follows that there can be no estoppel to the change of a method so ....
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.... barred from adopting a different method, from that adopted by the assessee in the transfer pricing report, if the latter is not found to be the Most Appropriate Method. 33.3 Adverting to the facts of the extant case, it is seen that the assessee applied 'Other method' in its TPSR with a note on para 7.3 that: 'Given that the Other method has been selected as the most appropriate method, the other methods (CUP, RPM, CPM, PSM, TNMM) have not been evaluated further'. This shows that the assessee did not remark that the CUP was not the most appropriate method and simply left it from evaluation. However, it was categorically urged before the TPO, as is evident from para 12.4 of his order, that: 'since the payment made to the third party is more than the payment made to the AE for the same set of rights, a CUP exists'. Para 12.5 of the TPO's order also records the defending by the assessee of the CUP method. Thus it is graphically clear that the assessee not only argued before the existence and the applicability of the CUP before the TPO as the most appropriate method, but also heavily relied on the same during the course of the hearing before the Tr....
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....o made elaborate submissions on the same. Thus the reliance of the Id. DR on rule 11 of the ITAT Rules is misconceived. 33.5 We ergo, hold that an assessee, in principle, can resile from the most appropriate method as was adopted in its transfer pricing study report." 6.3. We also note the following factual and economic differences in CUP comparables: * Volume of Transactions: AE sold 7.67 crore kg of potatoes to the assessee, whereas the sales to non-AEs (used as CUP comparables) averaged less than 1% of this quantity. This clearly renders volume non-comparable. * Product Differentiation: Although invoices do not mention variety, internal books and ERP system record product grades (LR, Santana, Kennebec, Frysona, etc.) with distinct commercial value. Such information was verified on sample basis by the TPO. * Contractual Framework: AE was bound to sell to ASPL on cost-plus basis, whereas third-party sales were discretionary and market driven, influenced by seasonal and perishable nature of potatoes. * Functional Profile: The assessee provided evidence of its seed licensing, R&D, farming support, quality assurance, etc., while AE mere....
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....ns may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price" Para 2.20 For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable For commodities the economically relevant charactenstics include, among others, the physical features and quality of the commodity, the contractual terms of the controlled transaction such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms For some commodities, certain economically relevant charactenstics (eg prompt delivery) may lead to a premium or a discount If the quoted price is used as a reference for determining the arm's length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where t....
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....P method compares the price charged with regard to a controlled transaction for transfer of goods or services to the price charged for transfer of goods or services in a third-party scenario having comparable circumstances. Accordingly, while applying CUP there shall be certain adjustments i.e. type and quality of the products, Delivery terms, Volume of sales and related discounts, Contractual terms, Allocation of risk, Geographical factors, etc. which needs to be made to eliminate the differences in the transactions between independent enterprises which has material impact on the price to reasonable extent. 9.1. Thus the nature of end consumer/business model of consumer to whom the product is being sold needs to be considered for comparability analysis. The price at which the product sold by an entity to a consumer for end-use (B2C model) may not be comparable with the price of the product sold to a consumer, who is using such product for its business (ie., B2B model). In this regard, reference to the decision of the Kolkata Tribunal in the case of Philips Carbon Black Ltd. [2022] (142 taxmann.com 325) (Kolata - Trib.) wherein the Tribunal has also appreciated the difference be....
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....e different and are not comparable as can be observed from the quality wise details maintained in the books of account of the Assessee. 9.5. In view of the above, TPO/DRP has not taken any accurate adjustments in order to apply CUP method nor considered the impact of above factors/fundamental differences while applying CUP method. Further, in the absence of lack of data in public domain to make accurate adjustments, it can be concluded that CUP cannot be considered as the most appropriate method in the present case and the analysis undertaken by the Assessee in TP study as well as by the ld TPO as confirmed by DRP suffer from various flaws does not reflect the correct ALP. 9.6. Now once it is concluded that CUP cannot be applied in the present case, the next best possible option is to consider TNMM as the most appropriate method. We find that the Assessee has submitted alternative benchmarking methodology during the course of assessment proceedings. Before coming to search submitted by the Assessee, in order to apply TNMM, first step would be decide the tested party. The tested party is usually the participant in a transaction for which profitability can be ascertained most r....