2015 (4) TMI 948 - HC - Income Tax

Transactional Net Margin Method ( TNMM ) - Transfer pricing adjustment - whether TNMM was the most appropriate method for transfer pricing determination in arriving at the arm s length price (ALP) to bench mark the assessee/respondent s international transaction regarding provision of agency and marketing support services for AY 2008-09? - Held that - TPO discarded TNMM as the most appropriate method, holding that the assessee assumed significant risks, and relied on unique intangibles thus resulting in higher profits of the AE which should be attributed to it. In a given case, concededly this can be argued if the facts can logically support such a conclusion. However, the revenue cannot merely state that significant risks, such as credit, operational, manpower and other risks were borne or that the assessee s business was subjected to fluctuations. It merely mediated between the AEs and customers/vendors in India. Furthermore, it only supplied information to the AEs and mediated between them and Indian enterprises in the transactions arranged independently between them. The observations that the AE s decisions were taken by the assessee is a general one, unsupported by any independent material; it is anecdotal and based on the TPO s belief, rather than objective fact based analysis. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. This court also concurs with the ITAT s finding that the assessee s risk was limited and minimal with least capital employed, and that the TPO s findings that it (the assessee) performed all the crucial functions on behalf of the AEs was not proved. The TPO did not dispute the facts given by the assessee and held without foundation that it undertook all the critical functions of its AEs. This finding was unsubstantiated and generally made; the TPO never elaborated any critical function or decision of the assessee inuring to the AEs except saying that the assessee was engaged in arranging for feasibility studies, industry analysis, and project evaluation for potential projects identified by its AEs. It is quite evident that the TPO based his findings and conclusions on the decision of the ITAT in Li Fung (2011 (9) TMI 204 - ITAT, New Delhi), which was subsequently reversed by this Court. Resultantly, we hold that the ITAT s conclusion that the TNMM was the most appropriate method and that the TPO had to make a fresh determination of the ALP of the disputed international transactions of Provision of Agency and marketing support services' amounting to ₹ 32.18 crores based on the TNMM is reasonable, not calling for interference - no substantial question of law arises . - Decided against revenue.

Summary

Issues Involved:
1. Appropriateness of the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) of international transactions.
2. Application of the Profit Split Method (PSM) by the Transfer Pricing Officer (TPO).
3. Assumption of significant risks and development of unique intangibles by the assessee.
4. Comparison with the case of M/s Li & Fung (India) Pvt. Ltd.
5. Rejection of TNMM by the TPO.
6. Determination of the ALP for the disputed international transactions.

Detailed Analysis:

1. Appropriateness of the Transactional Net Margin Method (TNMM):
The revenue challenged the ITAT's decision that TNMM was the most appropriate method for determining the ALP of the assessee's international transaction regarding "provision of agency and marketing support services" for AY 2008-09. The ITAT had accepted the assessee's use of TNMM with a Profit Level Indicator (PLI) of OP/OC, reporting a profit rate of 16.87%, which was above the 13.81% PLI of certain unrelated comparables.

2. Application of the Profit Split Method (PSM) by the Transfer Pricing Officer (TPO):
The TPO rejected the TNMM and applied the PSM, arguing that the assessee's functions were critical and involved significant risks, warranting a share in the profits of the AEs. The TPO relied on the ITAT's decision in M/s Li & Fung (India) Pvt. Ltd., applying a profit split ratio of 70:30 in favor of the assessee. The TPO calculated the assessee's share of the profits based on the global trading volume of the MCJ group and proposed a transfer pricing adjustment of Rs. 30.14 crores.

3. Assumption of Significant Risks and Development of Unique Intangibles by the Assessee:
The TPO contended that the assessee performed crucial functions, assumed significant risks, and developed unique intangibles benefiting the AEs, justifying the application of PSM. However, the ITAT found no substantial evidence supporting these claims. The ITAT noted that the assessee's role was limited to mediating between AEs and Indian vendors/customers, with minimal risk and capital employed.

4. Comparison with the Case of M/s Li & Fung (India) Pvt. Ltd.:
The TPO's decision heavily relied on the ITAT's order in the case of M/s Li & Fung (India) Pvt. Ltd., which was later reversed by the Delhi High Court. The ITAT in the present case found that the TPO's reliance on the Li & Fung decision was misplaced, as the facts and circumstances differed significantly.

5. Rejection of TNMM by the TPO:
The ITAT observed that the TPO did not provide adequate reasons for rejecting TNMM. The TPO's assertions about the development of unique intangibles and assumption of significant risks were unsubstantiated and lacked material evidence.

6. Determination of the ALP for the Disputed International Transactions:
The ITAT concluded that the TPO's findings were baseless and unsupported by evidence. The ITAT set aside the TPO's order and directed a fresh determination of the ALP using TNMM, allowing the assessee a reasonable opportunity to present its case.

Conclusion:
The Delhi High Court upheld the ITAT's decision, affirming that TNMM was the most appropriate method for determining the ALP of the disputed international transactions. The court found no substantial question of law warranting interference and dismissed the revenue's appeal. The court emphasized that the TPO's reliance on the reversed Li & Fung decision was erroneous and that the TPO failed to substantiate claims of significant risks and unique intangibles. The matter was remanded for a fresh determination of the ALP using TNMM.