2014 (6) TMI 697 - AT - Income Tax

Transfer pricing adjustment Determination of ALP - Adoption of most appropriate method Held that - Following Twilight Jewellery (P.) Ltd. Versus Dy. Commissioner of Income Tax 2014 (4) TMI 200 - ITAT MUMBAI - if any of the direct methods like CUP, RPM or CPM can be adopted for bench marking the transactions, then they should be given preference and once these traditional methods are rendered inapplicable then only the TNMM should be resorted to as a last measure - this argument of applicability of internal CUP has not been taken up either before the TPO or before the DRP thus, the matter is required to be remitted back to the TPO for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
1. Validity of assessment order passed by Assessing Officer under section 143(3) read with section 144C(13).
2. Selection of the most appropriate method (MAM) for determining arm's length price.
3. Rejection of comparable companies selected by the Transfer Pricing Officer (TPO) while adopting TNMM method.
4. Confirmation of addition on account of transfer pricing adjustment.

Analysis:

Issue 1:
The appeal was filed against the final assessment order passed by the Assessing Officer under section 143(3) read with section 144C(13) for the assessment year 2009-10. The appellant contended that the assessment order was against the principles of natural justice due to directions issued by the Dispute Resolution Panel-II (DRP). The Tribunal noted that a similar issue had been considered in the appellant's case for the previous assessment year, where the matter was remanded back to the Assessing Officer/TPO for fresh examination. Consequently, the Tribunal set aside the current appeal to the Assessing Officer for a fresh adjudication based on similar grounds.

Issue 2:
Regarding the selection of the most appropriate method (MAM) for determining the arm's length price, the appellant argued that the Comparable Uncontrolled Price method (CUP) should have been considered due to the availability of internal CUP for the relevant year. The Tribunal observed that the business model of the appellant was unique, making benchmarking challenging. Referring to the earlier year's order, the Tribunal emphasized the importance of considering direct methods like CUP, RPM, or CPM before resorting to TNMM. As the argument for the applicability of internal CUP was not raised earlier, the Tribunal remanded the matter back to the Assessing Officer/TPO to re-examine the MAM based on fresh submissions and comparables.

Issue 3:
The appellant contested the selection of comparable companies by the TPO while adopting the TNMM method, arguing that the chosen comparables were not suitable. Despite detailed objections raised before the DRP, the appellant's contentions were rejected. The Tribunal, in line with its earlier order, directed the Assessing Officer/TPO to reconsider the comparability analysis with unrelated parties, emphasizing the need to explore the applicability of internal CUP and Cost Plus Method if the CUP method failed.

Issue 4:
The final issue revolved around the confirmation of the addition on account of transfer pricing adjustment. The Tribunal, following the precedent set in the earlier year, remanded the entire matter of transfer pricing adjustment back to the TPO/AO for fresh adjudication, providing the appellant with a fair hearing opportunity. The appeal was allowed for statistical purposes, and the assessment was set aside for reconsideration in light of the Tribunal's observations.

In conclusion, the Tribunal's judgment focused on ensuring a fair and thorough examination of transfer pricing issues, emphasizing the importance of selecting the most appropriate method and comparables for determining the arm's length price. The remand back to the Assessing Officer/TPO aimed at addressing the concerns raised by the appellant and ensuring a just outcome in line with legal principles and precedents.