2018 (9) TMI 2015 - AT - Income Tax

TP Adjustment - selection of MAM - Resale Price method (RPM), Cost Plus Method (CPM) and Transaction Net Margin Method (TNMM) - HELD THAT - As far as international transactions for purchase of raw materials is concerned, the only reason given by the TPO in rejecting CPM as MAM is the absence of gross margins of the assessee and the manner in which it was computed. In this regard, we find that in a letter dated 14.10.2014 filed by the assessee before the TPO the assessee has given cost of sales and other indirect cost. The same is at page 525 of assessee s PB. In these circumstances, we are of the view that the reasons given by the TPO for rejecting CPM as MAM cannot be sustained. As far as international transaction of trading in water heaters is concerned, this Tribunal has already taken a view in assessee s own case for AY 2010-11 that RPM is the MAM. Following the aforesaid order, we hold that the TPO is not correct in rejecting the RPM as MAM. Determination of ALP for both international transactions are concerned, we are of the view that the provisions of section 92 mandate determination of ALP. The fact that after carrying out such exercise, the profit margins of the assessee would be abnormal cannot be the basis to accept the price paid in the international transactions as at arm s length. In other words, it is mandatory to determine the ALP in the manner contemplated by the Act and the Rules. In our view, the DRP fell into an error in accepting the price received by the assessee in international transactions as at arm s length without carrying out such an exercise. We therefore feel it proper to set aside the order of DRP and remand to the AO/TPO for fresh consideration the determination of ALP on the basis of MAM as adopted by the assessee in its TP study. As assessee submitted before us that the comparables chosen by the assessee in its TP study were also chosen by the TPO, when he adopted TNMM. His prayer was that pursuant to the remand by the Tribunal, the TPO should be directed to restrict himself from choosing any fresh comparables. In our view, the TPO has to carry out the exercise in accordance with the law and no restriction can be placed on his powers to bring any relevant and appropriate data on record in the matter of determination of ALP. Appeal by the revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of the Most Appropriate Method (MAM) for computing Arm's Length Price (ALP) for international transactions.
2. Appropriateness of the Cost Plus Method (CPM) and Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM).
3. Validity of the adjustments proposed by the Transfer Pricing Officer (TPO).
4. Consideration of economic and business reasons for losses incurred by the Assessee.
5. Use of multiple-year data for computing profit margins.
6. Calculation errors in the margins of comparable companies.

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for computing ALP for international transactions:
The Assessee, a wholly-owned subsidiary of AOS Netherlands, entered into international transactions involving the distribution and marketing of products and the purchase of raw materials. The Assessee adopted RPM for trading and CPM for manufacturing as the MAM for determining ALP. The TPO rejected these methods and adopted TNMM instead. The Dispute Resolution Panel (DRP) later agreed with the Assessee's choice of methods.

2. Appropriateness of CPM and RPM versus TNMM:
The TPO rejected CPM for manufacturing due to the lack of details on how gross profit was computed and rejected RPM for trading due to the absence of function and cost details. The DRP, however, found that the adjustments proposed by the TPO would result in abnormal profit levels and concluded that the Assessee's methods were appropriate. The Tribunal upheld the DRP's decision, stating that the reasons given by the TPO for rejecting CPM and RPM were not sustainable.

3. Validity of the adjustments proposed by the TPO:
The TPO's adjustments resulted in ALP calculations that were significantly higher than the actual transaction values, leading to abnormal profit margins. The DRP found this approach incorrect and directed the AO to compute ALP using the Assessee's chosen methods. The Tribunal agreed with the DRP, emphasizing that the TPO's adjustments were not justified.

4. Consideration of economic and business reasons for losses incurred by the Assessee:
The Assessee argued that the losses were due to economic and business reasons, including underutilization of capacity, rather than transfer pricing issues. The Tribunal did not specifically address this argument but focused on the appropriateness of the methods used for determining ALP.

5. Use of multiple-year data for computing profit margins:
The Assessee contended that multiple-year data should be used for computing profit margins. The Tribunal did not explicitly address this issue in its judgment but remanded the case to the AO/TPO for fresh consideration, implicitly leaving this matter open for further examination.

6. Calculation errors in the margins of comparable companies:
The Assessee pointed out errors in the computation of margins for comparable companies. The Tribunal did not delve into these specific errors but remanded the case for a fresh determination of ALP, which would presumably include a re-examination of these calculations.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the case to the AO/TPO for a fresh determination of ALP using the Assessee's chosen methods. The Cross Objection filed by the Assessee was dismissed, but the Tribunal granted liberty to raise all pleas in the set-aside proceedings. The Tribunal emphasized the necessity of determining ALP in accordance with the law and did not restrict the TPO from choosing fresh comparables if necessary.