2019 (11) TMI 1419 - AT - Income Tax

TP Adjustment - selection of MAM - TNMM or CUP method - appropriate method for determining the arms length price - HELD THAT - We do not find that any case has been made out by the Transfer Pricing Officer or the DRP that there was an error committed earlier when the TNMM method was chosen and approved. The Transfer Pricing Officer while justifying the change stated that in T.P. report assessee has bench marked the transaction under TNMM verifiable data has been provided to substantiate the method used. Hence from the above discussion we find that no cogent reason has been pointed out by the authorities below that the TNMM method applied earlier was not in accordance with the mandate of law as above. It is settled law that resjudicata does not apply to taxation proceedings but it has fairly often been held by the higher courts including by the Hon ble Apex Court that the consistency should be maintained in the assessment proceedings. A consistently applied method can be changed only if there is a change in facts and law. In the present case we find that there is no such case has been made out. Rather the Transfer Pricing Officer has proceeded to examine the issue on the basis of TNMM method. He has ordered for updated data of comparable. Thereafter when even on the basis of updated data the international transaction was found to be at arm s length he laconically held that CUP method would be preferred. The DRP had summarily upheld the change from TNMM to CUP method without assigning any cogent reason whatsoever. By no means it is justified to keep on finding a method for addition by trial and error method. Transfer Pricing officer has changed the consistently applied TNMM method to the cup method. While doing so he has blandly held that TNMM method is not full proof. Furthermore the assessee s objection that the comparison of other transactions have to be considered by adjustment of various factors is also not fully dislodged. We hold that the change in method from TNMM to CUP method is not justified.

Summary

Issues Involved:
1. Transfer pricing adjustment by rejecting the TNMM method and adopting the CUP method.
2. Adjustment for tax deducted at source.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment by Rejecting the TNMM Method and Adopting the CUP Method:

The central issue in the appeals is the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) by rejecting the Transactional Net Margin Method (TNMM) adopted by the assessee and replacing it with the Comparable Uncontrolled Price (CUP) method. The adjustments made for the assessment years 2005-06, 2006-07, and 2007-08 were ?2,75,93,140, ?6,42,78,560, and ?6,37,42,069 respectively.

The assessee, engaged in the business of developing, manufacturing, and marketing additive systems, used the TNMM method to determine the arm's length price for its international transactions, including the export of chemical additives. The TPO, however, observed a difference in the rates charged to associated enterprises (AEs) and non-associated enterprises (non-AEs) and issued a show-cause notice to the assessee. The TPO was not convinced by the assessee's explanations regarding factors affecting comparability, such as geographical market differences, volume of sales, export benefits, and risk adjustments, and summarily rejected the TNMM method.

Upon appeal, the learned Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's contention and rejected the TPO's change of method, emphasizing that the TNMM method had been consistently applied and accepted in earlier years. The CIT(A) noted that the TPO failed to consider the huge differences in volume and geographical regions between sales to AEs and non-AEs, which precluded the application of the CUP method. The CIT(A) further highlighted that the assessee's margins were favorable compared to its comparables, demonstrating that the transactions were at arm's length.

For assessment years 2006-07 and 2007-08, the learned Dispute Resolution Panel (DRP) upheld the TPO's action without elaboration but provided some directions for adjustments. The Income Tax Appellate Tribunal (ITAT) found that the TPO had rejected the consistently applied TNMM method without bringing on record any cogent material to justify the change. The ITAT emphasized that a consistently applied method should not be rejected without cogent reasons and upheld the CIT(A)'s order for 2005-06 while setting aside the TPO's order for 2006-07 and 2007-08.

The ITAT referred to precedents, including the case of Omni Active Health Technologies Ltd. and Glenmark Pharmaceuticals Ltd., where it was held that a consistent method should not be changed without a change in facts or law. The ITAT concluded that the change from TNMM to CUP method was not justified and set aside the TPO's order.

2. Adjustment for Tax Deducted at Source:

The other issues raised in the assessee's appeal related to adjustments for tax deducted at source, which were deemed consequential. The Assessing Officer was directed to consider these adjustments accordingly.

Conclusion:

In conclusion, the ITAT dismissed the Revenue's appeal and allowed the assessee's appeals, upholding the consistent application of the TNMM method for transfer pricing benchmarking and rejecting the TPO's adoption of the CUP method without cogent reasons.