2022 (4) TMI 1483 - AT - Income Tax

TP Adjustment - selection of MAM - TPO rejected the RPM as the most appropriate method and chose Transaction Net Margin Method (TNMM) - HELD THAT - As identical issue considered by the Tribunal in assessee s own case in Assessment Year 2008-0 held that TNMM is the most appropriate method in the case of the assessee for determination of ALP. We therefore dismiss ground No.2 raised by the assessee. TP adjustment restricted only to AE transactions OR non-AE transactions - HELD THAT - TP adjustments should be done only with AE transaction. Comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Application of turnover filter - Companies rejected no following application of turnover filter. Determination of ALP in respect of providing guarantee by the assessee to its AE, Sabinsa Corporation, Piscutaway, New Jersey - As relying on assessee own case we direct the AO to adopt 0.5% of the guarantee amount as the ALP. We hold and direct accordingly.

Issues Involved:
1. Incorrect business description by the AO.
2. Selection of the most appropriate method for determining Arm's Length Price (ALP).
3. Applicability of transfer pricing adjustment to sales made to Non-AEs.
4. Rejection of comparable companies selected by the assessee.
5. Selection of functionally dissimilar comparable companies by the TPO.
6. Application of turnover filter for selecting comparable companies.
7. Denial of risk adjustment in computing TP adjustment.
8. Treatment of corporate guarantee as an international transaction.
9. Determination of commission rate for corporate guarantee.

Issue-wise Detailed Analysis:

1. Incorrect Business Description by the AO:
The assessee contended that the AO incorrectly described its business, stating it dealt with windmill parts instead of herbal products. The Tribunal acknowledged the error but deemed it immaterial, noting that windmill parts and herbal products are significantly different.

2. Selection of the Most Appropriate Method for Determining ALP:
The assessee preferred the Cost Plus Method (CPM) for determining ALP, while the TPO selected the Transaction Net Margin Method (TNMM). The Tribunal upheld the TPO's choice of TNMM, referencing its previous decisions in the assessee's own cases for earlier assessment years, confirming TNMM as the most appropriate method.

3. Applicability of Transfer Pricing Adjustment to Sales Made to Non-AEs:
The assessee argued that TP adjustments should only apply to AE transactions, not to Non-AE transactions. The Tribunal agreed, referencing its earlier decision in the assessee's case for AY 2008-09, directing that TP adjustments should be confined to AE transactions only.

4. Rejection of Comparable Companies Selected by the Assessee:
The TPO rejected the assessee's comparables (Synthite Industries Ltd., Infrag Ltd., and Surya Herbal Ltd.). The Tribunal noted that the TPO did not adjudicate on the comparability of Infrag Ltd. and Surya Herbal Ltd. and remitted the issue for fresh consideration regarding these two companies.

5. Selection of Functionally Dissimilar Comparable Companies by the TPO:
The assessee contested the inclusion of Amrutanjan Healthcare Ltd., AVT Natural Products Ltd., and Shilpa Medicare Ltd. as comparables. The Tribunal found that AVT Natural Products Ltd. and Shilpa Medicare Ltd. exceeded the turnover filter of Rs. 200 crores applied by the TPO, directing their exclusion based on consistent application of turnover filters in similar cases.

6. Application of Turnover Filter for Selecting Comparable Companies:
The Tribunal upheld the application of the turnover filter, referencing multiple decisions, including Dell International Services India (P) Ltd. and Autodesk India Pvt. Ltd., which supported excluding companies with significantly higher turnovers as comparables.

7. Denial of Risk Adjustment in Computing TP Adjustment:
The assessee sought risk adjustment, arguing it did not perform marketing functions. The Tribunal rejected this plea due to the lack of quantification of the risk adjustment by the assessee.

8. Treatment of Corporate Guarantee as an International Transaction:
The assessee initially contested that providing a corporate guarantee was not an international transaction but conceded during the hearing. The Tribunal confirmed that corporate guarantees are international transactions requiring ALP determination.

9. Determination of Commission Rate for Corporate Guarantee:
The AO adopted a 3% commission rate for the corporate guarantee, based on financial institutions' rates. The Tribunal, referencing its previous decision in the assessee's case for AY 2009-10, directed the AO to adopt a 0.5% commission rate, aligning with the Tribunal's consistent stance on this issue.

Conclusion:
The Tribunal partly allowed the appeal, providing specific directions on each issue, including remitting certain matters for fresh consideration and directing adjustments based on established precedents. The judgment emphasized consistency in applying legal principles and previous decisions in similar cases.

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