2015 (5) TMI 436 - HC - Income Tax

Transfer pricing adjustment - determination of ALP - ITAT in the impugned order discussed the nature of transactions and noticed that for benchmarking international transactions the AE had adopted the most appropriate method i.e. ANMM with PLI ratio (Indian law gives the dictates of Rule 10B of Income Tax Rules) - whether the TPO - and consequently the AO fell into error in not accepting the clubbing of transactions suggested by the assessee - Held that - Issue which it is concerned with is AY i.e. 2009-2010 involves extremely restricted one. Having clubbed the transactions for the purpose of ALP determination whether the TPO/AO could have refused to follow the logic and consider the comparable profits from non-AE transactions in both segments is in issue. All that the ITAT did, in our view, was to cure this defect or anomaly and direct the AO to consider the margin of commission in each segment while determining the ALP. We at the same time clarify that the AO - who is now directed to carry out the exercise shall do so by applying principles in Rule 10(B) of the Income Tax Rules. The appeal is disposed of but in terms of above directions. It is clarified that this Court is not in any way disturbing the Tribunal s direction to determine the rate of commission in either segment.

Summary

Issues:
1. Appeal by Revenue against ITAT order for AY 2009-2010 regarding arms length price (ALP) determination.
2. Dispute over ALP determination for commission and trading segments.
3. Application of TNMM method and comparison of commission percentages from AE and non-AE transactions.
4. Consideration of Berry ratio and TNMM method under Indian law.
5. Whether TPO/AO could refuse to consider comparable profits from non-AE transactions in both segments.

Analysis:
1. The Revenue appealed against the ITAT order for AY 2009-2010, challenging the ALP determination. The dispute arose from the adjustment of &8377; 88,40,13,476/- directed by the TPO, which was accepted by the AO. The ITAT discussed the nature of transactions and found the TPO's approach faulty in not considering the margin of commission in each segment while determining the ALP.

2. The assessee, engaged in import and export activities, had two business segments: commission business and trading activities. The TPO rejected the TNMM method suggested by the assessee and made adjustments based on profit margins from non-AE transactions. The ITAT directed the AO to consider commission margins in each segment for ALP determination, emphasizing the functional differences between trading and commission businesses.

3. The ITAT compared commission percentages from AE and non-AE transactions, highlighting the need to benchmark commission rates based on non-AE transactions for indenting business segments. The Tribunal's decision was based on precedents from earlier years and rejected the application of TNMM method suggested by the assessee.

4. The Court noted the contention regarding the Berry ratio and TNMM method under Indian law, emphasizing the ongoing debate on the application of TNMM method. The Court directed the AO to determine commission rates in each segment in compliance with Rule 10(B) of the Income Tax Rules.

5. The Court clarified that the issue for AY 2009-2010 was narrow, focusing on whether the TPO/AO could refuse to consider comparable profits from non-AE transactions in both segments for ALP determination. The ITAT's direction to consider commission margins in each segment was upheld, and the AO was instructed to follow Rule 10(B) principles while carrying out the exercise. The appeal was disposed of with these directions, maintaining the Tribunal's decision on determining commission rates in each segment.