2015 (2) TMI 63 - AT - Income Tax

Transfer Pricing Adjustment - international transaction of Sale of finished goods - Held that - When we advert to the facts of the instant case, it is found that the TPO proposed the transfer pricing adjustment with the Nil ALP of the Commission transaction on the ground that no evidence was furnished about any services rendered by the foreign AE. The AO in his final assessment order dated 30.11.2012 has taken the ALP at Nil without anything further. Applying the ratio decidendi of Cushman and Wakefield India Pvt. Ltd. (2014 (5) TMI 897 - DELHI HIGH COURT) to the facts of the instant case, we find that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. Since the authorities below have acted in contradiction to the ratio laid down by the Hon ble Jurisdictional High Court in the case of Cushman (supra), we set aside the impugned order on this score and remit the matter to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon ble jurisdictional High Court in the case of Cushman (supra). - Appeal is allowed for statistical purposes.

Summary

Issues:
1. Addition on account of Transfer Pricing Adjustment from international transaction of 'Sale of finished goods'.
2. Commission payment by the assessee to its AEs benchmarked under the TNMM.

Analysis:

Issue 1: Addition on account of Transfer Pricing Adjustment from international transaction of 'Sale of finished goods'.
The appellant, an Indian subsidiary company, applied the Transactional Net Margin Method (TNMM) on entity level for demonstrating that all international transactions, including the 'Sale of finished goods', were at Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) rejected the TNMM on entity level and used the Comparable Uncontrolled Price (CUP) method for determining the ALP of the 'Sale of finished goods'. The TPO proposed a Transfer Pricing Adjustment based on the price differences in specific transactions. The Tribunal held that the TNMM on entity level was not acceptable as the transactions were not closely linked. It approved the TPO's use of the CUP method and the methodology for determining the ALP of the international transaction. However, the Tribunal directed the TPO to consider the average price of comparable uncontrolled transactions for determining the benchmark price in specific instances.

Issue 2: Commission payment by the assessee to its AEs benchmarked under the TNMM.
The appellant's commission payment to its AEs was benchmarked under the TNMM, which the TPO rejected and determined the ALP under the CUP method. The TPO concluded that the ALP of the commission transaction was Nil due to lack of evidence of services rendered by the AEs. The Tribunal noted that the TPO's role is limited to determining the ALP and not deciding on the existence of services or benefits. Referring to a relevant High Court case, the Tribunal held that the TPO should only determine the ALP, while the AO should decide on the deductibility of the expenditure under section 37(1) of the Income-tax Act. As the authorities below acted contrary to the High Court's ruling, the Tribunal remitted the matter to the AO/TPO for a decision in line with the legal principles.

In conclusion, the Tribunal allowed the appeal for statistical purposes and remitted both issues back to the respective authorities for redetermination in accordance with the directions provided in the judgment.