2015 (12) TMI 1779 - AT - Income Tax

TPA - whether the internal comparables should be adopted over external comparables for the purposes of computing ALP in respect of transaction pertaining to export of goods - TNMM has been accepted by both the parties as MAM - Held that - Internal comparables are to be preferred to external comparables. There is no dispute that the assessee has internal comparables. Geographical differences are not relevant when FOB price is considered. Set aside the matter to the TPO with a direction to consider the sale in respect of export to AE s at FOB value. Even otherwise except for export to Germany there are no geographical variations. The ld.TPO is directed to apply internal comparables at FOB value as in his view this value is the comparable value. The assessee is directed to furnish the audited financials of the segmental accounts - Restore the issue to the files of the TPO/AO for fresh adjudication of the ALP as per the directions given herein - Decided in favour of assessee for statistical purposes.

Issues Involved:

1. Determination of the most appropriate method (MAM) for computing the Arm's Length Price (ALP) of international transactions.
2. Appropriateness of using internal comparables over external comparables for the Transactional Net Margin Method (TNMM).
3. Legality and procedural correctness of the directions and orders issued by the Dispute Resolution Panel (DRP) and the Transfer Pricing Officer (TPO).

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for Computing ALP:

The primary issue was whether the internal Transactional Net Margin Method (TNMM) or the Comparable Uncontrolled Price (CUP) method should be used to determine the ALP of international transactions. The assessee had adopted TNMM as the MAM for determining the ALP for export sales, IT-related services, and packing charges, while using CUP for marketing and logistic support services and cost recharges. The TPO initially applied CUP to determine the ALP, leading to an adjustment of Rs. 49,52,417/-. The DRP upheld this decision without proper consideration, leading to a remand by the Tribunal for de novo consideration.

Upon reconsideration, the DRP directed the TPO to use TNMM with suitable external comparables, resulting in a revised adjustment of Rs. 3,12,08,723/-. The assessee contested this, arguing that internal comparables should be preferred over external comparables, especially since internal comparables existed and were acknowledged by the DRP and TPO in earlier proceedings.

2. Appropriateness of Using Internal Comparables Over External Comparables for TNMM:

The Tribunal emphasized that internal comparables should be preferred over external comparables when available. The assessee had segmented its profit and loss account into domestic sales, export sales to AEs, and export sales to non-AEs, and used internal TNMM for benchmarking. The Tribunal found merit in the assessee's argument that geographical differences are irrelevant when considering the FOB value, as this excludes variable factors like freight and insurance.

The Tribunal directed the TPO to consider the sales to AEs at FOB value and apply internal comparables. The assessee was also directed to furnish audited financials of the segmental accounts for a fresh adjudication of the ALP.

3. Legality and Procedural Correctness of the Directions and Orders Issued by DRP and TPO:

The assessee raised several procedural issues, including the DRP's direction for further inquiry and fresh search, which they argued was against the proviso to section 144C(8) of the Income Tax Act. The assessee also contended that the TPO's rejection of the internal TNMM analysis and segmental financials was unjustified and inconsistent with previous years' assessments. The Tribunal noted these procedural concerns but focused primarily on the substantive issue of the appropriate method for determining ALP.

Ultimately, the Tribunal restored the matter to the TPO for fresh adjudication, emphasizing the use of internal comparables at FOB value and directing the assessee to provide the necessary audited financials.

Conclusion:

The Tribunal allowed the assessee's appeal for statistical purposes, setting aside the matter to the TPO for fresh adjudication with specific directions to use internal comparables and consider the sales to AEs at FOB value. The order was pronounced in the open court on 04/12/2015.

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