2019 (7) TMI 1618 - AT - Income Tax

TP Adjustment - MAM selection - TNMM or CUP method - non grant of Royalty and Product Development fee - HELD THAT - Tribunal held that the assesee had been consistently following the TNMM method as accepted by the authorities and therefore it is not open for the TPO to apply the CUP method abruptly without assigning any reason and such an act of the TPO amounts to deciding the issue by sitting in the armchair of the businessman/assessee. Tribunal held that the application of benefit test is impermissible and as a matter of fact the payment of royalty and product development fee are intrinsically interlined with the production and sales and can only be decided under TNMM. On this premise the Tribunal set aside the impugned order and remanded the issue back to the ld. TPO to decide it afresh after providing an opportunity to the assessee. With this view of the matter we set aside order and remand the issue relating to the royalty and product development fee to the file of the ld. TPO for deciding it afresh - Appeal is allowed for statistical purposes.

Summary

Issues:
1. Arm's length price determination for international transactions.
2. Exclusion of comparable in transfer pricing analysis.
3. Treatment of Royalty and Product Development fee.

Analysis:

1. The appellant, a company engaged in manufacturing automotive brakes and components, filed its return of income for the Assessment Year 2014-15, declaring total income as nil. The Transfer Pricing Officer (TPO) was referred to determine the arm's length price for international transactions. The Dispute Resolution Panel (DRP) excluded one comparable from the final list, resulting in a transfer pricing adjustment of Rs. 11,47,92,236 to the appellant's income. The appellant contested the non-grant of relief regarding Royalty and Product Development fee.

2. The appellant contended that it consistently followed the Transactional Net Margin Method (TNMM) for transfer pricing, providing evidence such as agreements, invoices, and comparative rates of royalty paid by other group entities. The appellant cited a previous year's decision by a coordinate bench of the Tribunal in its favor under similar circumstances. The appellant argued that the TPO's application of the Comparable Uncontrolled Price (CUP) method without justification was inappropriate, and the issue should be decided under TNMM due to the inherent link between royalty payments and production/sales.

3. The Tribunal reviewed the facts and held that the appellant's TNMM approach was acceptable and criticized the TPO's unilateral shift to the CUP method without valid reasons. The Tribunal emphasized that the benefit test was impermissible and that royalty and product development fees were intricately connected to production and sales, warranting evaluation under TNMM. Consequently, the Tribunal set aside the previous order and remanded the issue to the TPO for fresh consideration, directing a fair opportunity for the appellant. The appeal was allowed for statistical purposes, emphasizing the need for a comprehensive review based on the Tribunal's directions.

This judgment underscores the importance of consistent transfer pricing methods, fair assessment practices, and the necessity to evaluate interlinked transactions appropriately under the relevant transfer pricing guidelines.