2020 (2) TMI 1389 - HC - Income Tax

TP Adjustment - MAM selection - AO Adopted the CUP method as Most Appropriate Method (MAM) - ITAT confirmed adoption of TNMM by the assessee as the Most Appropriate Method - HELD THAT - Tribunal considering the material on record has given the finding of fact that the TNMM applied by the assessee is the correct method and the application of CUP method was not justified, in view of the fact that intra AE transactions were fundamentally different in character in economic circumstances and contractual terms and these cannot be compared with the independent transactions entered into by the assessee. Tribunal has further discarded the view of the TPO dealing with the internal TNMM adopted by the assessee with regard to the basis of allocating the overrates being not clear, by observing that the revenue and expenses have been allocated on actual basis wherever the same were directly allocable and wherever the same were not directly allocable, allocation was made on the basis of the appropriate allocation key such as ratio of sales quantity, sales revenue and total revenue - segmental details have been reconciled with entity level audited accounts. TPO did not have any objection with regard to the allocation made by the assessee, but explanation given by the assessee was simply rejected as not accepted . CIT (A) also did not refer to any flow to the allocations made in the segmental accounts and discussed the issue on generalities only The Tribunal has taken into consideration the voluminous documentary evidence on record for the purpose of coming to the conclusion of adoption of TNMM by the assessee as the Most Appropriate Method of arriving at ALP. Delhi High Court in the case of Make My Trip India (P.) Ltd. 2017 (11) TMI 587 - DELHI HIGH COURT has also held that difference of opinion as to the appropriateness of one or the other method cannot be gone into in the appeal under Section 260A of the Act, 1961. Decision of the Tribunal is correct and requires no interference and no question of law much less any substantial question of law can be said to have arisen from the impugned order of the Tribunal. In the result, these appeals fail and are hereby dismissed.

Summary

Issues Involved:
1. Deletion of upward adjustment of ?2,78,02,502 on account of Transfer Pricing adjustments.
2. Rejection of TPO’s approach of rejecting TNMM and adopting CUP Method as MAM.
3. Allowing adjustments claimed by the assessee for material differences in contractual terms, underlying commercial circumstances, functions, risk, and other economic factors.

Detailed Analysis:

1. Deletion of Upward Adjustment of ?2,78,02,502 on Account of Transfer Pricing Adjustments:

The Tribunal deleted the upward adjustment of ?2,78,02,502 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal noted that the TPO had adopted the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) used by the assessee. The Tribunal found that the TPO's rejection of TNMM and adoption of CUP was not justified due to the significant differences in economic circumstances and contractual terms between the transactions with Associated Enterprises (AEs) and non-AEs. The Tribunal concluded that the TNMM applied by the assessee was the most appropriate method for determining the Arm’s Length Price (ALP).

2. Rejection of TPO’s Approach of Rejecting TNMM and Adopting CUP Method as MAM:

The Tribunal rejected the TPO's approach of rejecting the TNMM and adopting the CUP method as the Most Appropriate Method (MAM). The Tribunal highlighted that the CUP method requires a high degree of comparability not only in the products sold but also in the economic circumstances of the transactions. The Tribunal found that the TPO failed to make accurate adjustments for the differences in economic circumstances and contractual terms between the AE and non-AE transactions. The Tribunal emphasized that the selection of the most appropriate method should be based on the facts and circumstances of each particular transaction, and in this case, the TNMM was found to be more suitable.

3. Allowing Adjustments Claimed by the Assessee for Material Differences:

The Tribunal allowed the adjustments claimed by the assessee for material differences in contractual terms, underlying commercial circumstances, functions, risk, and other economic factors between the transactions with AEs and non-AEs while applying the CUP method. The Tribunal noted the following adjustments:
- Adjustment on account of business volumes difference.
- Adjustment for advance payment received from AE.
- Adjustment for marketing and selling expenses not required to be incurred for AE sales vis-à-vis non-AE sales.
- Adjustment for credit risk not required to be borne by the assessee for AE sales vis-à-vis non-AE sales.
- Adjustment for interest-free ECB loan received from AE.

The Tribunal found that these adjustments were necessary to account for the significant differences between the transactions with AEs and non-AEs. The Tribunal observed that the TPO and CIT(A) had failed to make these adjustments, which rendered the CUP method inappropriate for this case. The Tribunal concluded that the TNMM, which considers the overall profitability of the transactions, was more appropriate in this context.

Conclusion:

The Tribunal's decision was based on a detailed analysis of the facts and circumstances of the case, including the significant differences in economic circumstances and contractual terms between the transactions with AEs and non-AEs. The Tribunal found that the TNMM was the most appropriate method for determining the ALP and allowed the adjustments claimed by the assessee for material differences. The Tribunal's findings were upheld by the High Court, which dismissed the appeals filed by the Revenue, concluding that no substantial question of law arose from the Tribunal's decision.