2021 (1) TMI 1130 - AT - Income Tax

Rectification of mistake u/s 254 - determination of ALP of the international transaction of Management Fees - Tribunal has restored the issue of determination of the Arm s Length Price (ALP) of the international transaction of payment of Management Fees to the AO/TPO with a direction to select the correct method and then determine its ALP - Tribunal, in its order u/s 254(1), has rejected the selection of the Cost Plus method (CPM), the Transaction Net Marginal method (TNMM) and the Comparable Uncontrolled Price (CUP) method - HELD THAT - Tribunal observed certain inconsistencies in the application of the methods by the assessee and the TPO, which did not properly fit into the application mechanism. Those were the raison d etre for discarding their application. For example, the assessee wrongly considered foreign AE as a tested party or did benchmarking under the TNMM in an aggregate manner. The Tribunal did not approve this. Both these fall in the domain of wrong application of method. Similarly, the TPO did not select any comparable uncontrolled transaction under the CUP method, which got disapproved by the Tribunal in its order u/s 254(1) of the Act. This is again an instance of wrong application of method. Overruling the wrong application of the method doesn t mean ruling out the selection of that Method as well. If the wrong application of a method is corrected, there can be no impediment in its selection. To put it simply, it is still open in the fresh proceedings to choose the assessee as a tested party and benchmark the transaction on segregate basis and apply the TNMM; or to find out a suitable comparable uncontrolled transaction and apply the CUP method; so on and so forth. The long and the short of the whole thing is that selection of any of the methods is open before the TPO, who can reshuffle the existing data or require the assessee to make good the deficiencies in the existing data as observed by the Tribunal in its order u/s 254(1) and proceed with the determination of the ALP of the international transaction. Once the matter has been sent back to the TPO for a fresh determination of the ALP of the international transaction of the payment of Management services, we do not wish to clip his wings by directing to adopt a particular method only. Now it is within his domain to find out the most appropriate method in the facts and circumstances and proceed accordingly.

Summary

Issues:
1. Determination of Arm's Length Price (ALP) of international transaction of payment of Management Fees.

Analysis:
The Appellate Tribunal received a Miscellaneous Application from the assessee seeking clarification on the direction given in the previous order regarding the determination of the ALP of the international transaction of Management Fees. The Tribunal had instructed the Assessing Officer/Transfer Pricing Officer (AO/TPO) to select the correct method for determining the ALP. The assessee had applied the Transaction Net Marginal method (TNMM) with its foreign Associated Enterprise (AE) as a tested party and also used the aggregate approach, which were not approved by the Tribunal. The Tribunal rejected the TNMM, Cost Plus method (CPM), and Comparable Uncontrolled Price (CUP) method applications due to various reasons provided in the order. The Tribunal clarified that it rejected the application of these methods, not their selection.

The Tribunal emphasized that there are two crucial aspects in ALP determination - the selection of the method and its application. The Tribunal found fault with the wrong application of methods by both the assessee and the TPO, leading to inconsistencies in the application mechanism. The Tribunal highlighted instances where the methods were incorrectly applied, such as considering the foreign AE as a tested party or not selecting any comparable uncontrolled transaction under the CUP method. The Tribunal clarified that correcting the wrong application of a method does not rule out its selection in future proceedings. It is still open for the TPO to choose the appropriate method based on the facts and circumstances, reshuffle existing data, or require the assessee to rectify deficiencies in the data for determining the ALP of the international transaction.

Since the matter was remanded back to the TPO for a fresh determination of the ALP, the Tribunal did not restrict the TPO to adopt a specific method. The TPO has the discretion to determine the most appropriate method based on the circumstances. The Tribunal dismissed the contention raised by the assessee to direct the selection of a specific method in the Miscellaneous Application. Ultimately, the Miscellaneous Application was dismissed, and the TPO was given the flexibility to choose the method for determining the ALP of the international transaction of Management services.