2015 (11) TMI 186 - AT - Income Tax

Transfer pricing adjustment - whether the Comparable Uncontrolled Price (CUP) method is the most appropriate method as compared to Transactional Net Margin Method (TNMM) - Held that - The assessee bears lesser business risk than independent comparable enterprises due to the nature of its revenue model. It is beyond any doubt that the project receipts are from KMRCL which is a Government body and hence the margins earned by the assessee is bound to be comparatively lower to reflect the lower level of business risk involved. Moreover, the comparables selected for the analysis also include companies that performs additional functions while being engaged in providing comparable services. Further the risk profiles of independent companies differ from that of assessee. The impact of these functional and risk differences definitely require to be factored while determining the ALP. We find that in the interest of justice and fair play, we deem it fit and appropriate to set aside this issue to the file of the Learned TPO / AO with a direction to adopt CUP method as the Most Appropriate Method for determination of ALP for international transactions. The assessee is also directed to furnish the comparables based on independent TP study for adoption of CUP method and produce such other evidences and documents before the Learned TPO / AO to ensure quick disposal of this set aside proceedings. We also direct the Learned TPO / AO to permit the assessee to use multiple year data and adopt the weighted average data of the financial information of the comparables and use the same for determination of ALP of the international transactions of the assessee. Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Determination of the most appropriate method for computing the Arm's Length Price (ALP) between Comparable Uncontrolled Price (CUP) method and Transactional Net Margin Method (TNMM).
2. Admissibility of additional grounds of appeal regarding the method to be adopted.
3. Appropriateness of the comparables chosen by the Transfer Pricing Officer (TPO) for ALP determination.
4. Validity of shifting methods for ALP determination during different stages of proceedings.
5. Reimbursement of expenses and its impact on the choice of method for ALP determination.

Detailed Analysis:

1. Determination of the Most Appropriate Method for ALP:
The core issue was whether the CUP method or the TNMM was more appropriate for determining the ALP of international transactions between the assessee and its Associated Enterprise (AE). The assessee initially adopted the CUP method in its Form 3CEB filed with the return of income but later shifted to TNMM during the assessment proceedings. The TPO, however, used TNMM and rejected two comparables from the assessee's list, substituting them with two of his own, resulting in an upward adjustment of Rs. 2,38,81,864/-.

2. Admissibility of Additional Grounds of Appeal:
The assessee sought to revert to the CUP method at the appellate stage, arguing that the reimbursement of expenses was on a cost-to-cost basis without any profit element, making TNMM inappropriate. The tribunal admitted the additional grounds, citing the Supreme Court decision in NTPC Ltd vs CIT, which allows legal grounds that go to the root of the matter to be raised at any stage.

3. Appropriateness of Comparables Chosen by TPO:
The assessee argued that the comparables chosen by the TPO were highly experienced companies with an average of 22 years in operation, whereas the assessee was in its first year. This discrepancy was significant as the comparables had lower fixed costs and were engaged in functionally different fields. The tribunal agreed, referencing the Pune Tribunal's decision in Skoda Auto India P Ltd vs ACIT, which highlighted the need for adjustments when comparables have different business models or are at different stages of business cycles.

4. Validity of Shifting Methods for ALP Determination:
The tribunal examined whether the assessee could shift from TNMM to CUP at the appellate stage. Citing the Mumbai Tribunal's decision in Mattel Toys (I) (P) Ltd vs DCIT, it was held that the assessee is not precluded from arguing for a different method if it results in a more accurate determination of ALP.

5. Reimbursement of Expenses:
The tribunal found that for transactions involving reimbursement of expenses without a profit element, the CUP method was more appropriate than TNMM. This was supported by the Bangalore Tribunal's decision in Fosroc Chemicals India P Ltd vs DCIT, which emphasized that TNMM is unsuitable for expense transactions without a profit element.

Conclusion:
The tribunal set aside the issue to the TPO/AO with directions to adopt the CUP method for determining the ALP of the international transactions. The assessee was instructed to furnish comparables based on an independent TP study and other relevant documents. The TPO/AO was also directed to allow the use of multiple-year data and adopt weighted average data of the comparables' financial information for determining the ALP. The appeal was allowed for statistical purposes.

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