2015 (12) TMI 1513 - HC - Income Tax

Transfer pricing adjustment - ALP adjustment - appropriateness of adopting CUP method as against the TNMM for determination of the ALP - Held that - As the present appeals are concerned, the Court finds the impugned order of the ITAT to be well reasoned and researched to hold that the assessee s contention to the effect that the arm s length price of services rendered to, or received from, the associated enterprises, which was computed on the basis of the same 50 50 model as is the industry norm and as has been employed by the assessee for computing similar services to the independent enterprises, was at arm s length. Accordingly, the impugned arm s length price adjustment stands deleted. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by the ITAT in the impugned orders. - Decided against revenue

Summary

Issues:
1. Appropriateness of adopting CUP method vs. TNMM for determining ALP in international transactions.
2. Application of Rule 10B in determining arm's length price.
3. Validity of profit-sharing ratio as a basis for determining arm's length price.

Analysis:
1. The case involved two appeals by the Revenue challenging the orders of the ITAT for AY 2006-07 and AY 2007-08 regarding the determination of Arm's Length Price (ALP) for international transactions. The Assessee, a logistics service provider, used the Comparable Uncontrolled Price (CUP) Method for benchmarking its transactions with Associated Enterprises (AEs), with profits split 50:50 between the Assessee and AEs.

2. The Transfer Pricing Officer (TPO) rejected the CUP Method and adopted the Transactional Net Margin Method (TNMM) to determine ALP, citing the lack of data supporting the exact pricing of services in uncontrolled transactions. The TPO's adjustment resulted in a significant difference added back to the Assessee's income.

3. The ITAT noted the industry norm of a 50:50 profit-sharing model in the Assessee's line of business, both with AEs and unrelated parties. Despite the lack of precise data on pricing, the ITAT accepted the profit-sharing ratio as indicative of arm's length pricing, as the terms with AEs mirrored those with unrelated parties.

4. The ITAT emphasized the limitations of Rule 10B in applying traditional methods for determining ALP in unique business models like the Assessee's. It concluded that the Assessee's pricing, based on the 50:50 model, was at arm's length, deleting the ALP adjustment. The Court upheld the ITAT's well-reasoned decision, dismissing the Revenue's appeals.

5. The Court clarified that the appeals solely concerned the choice between CUP and TNMM methods for ALP determination, leaving open the possibility of revisiting other issues in a different case. No substantial legal questions were found in the ITAT's orders, leading to the dismissal of the appeals.

In conclusion, the judgment focused on the appropriateness of the CUP method, the application of Rule 10B, and the validity of the profit-sharing ratio in determining arm's length pricing for international transactions, ultimately upholding the ITAT's decision in favor of the Assessee.