2021 (11) TMI 1173 - AT - Income Tax

TP Adjustment - MAM selection - CUP method or TNMM - HELD THAT - We respectfully following case of Sumitomo Corporation India (P.) Ltd. 2018 (10) TMI 1785 - ITAT DELHI has held as under -hold that the CUP method cannot be applied in the case of the assessee for making an adjustment to the commission income of the assessee. The co- ordinate bench has also held that TNMM is the only method, which can be applied. Accordingly, the addition made on substantive basis adopting the CUP method is deleted. Accordingly, ground of the appeal are allowed. Benchmarking of the commission income from associated enterprises other than Japan - AO/TPO is directed to not to adopt CUP method for computation of the arm s-length price of the indent in business from non-Japan associated enterprises. Also is directed to adopt transactional net margin method adopting the berry ratio for computing the arm s-length price of the indent in business income from known the associated enterprises and not to consider the free on-board value of goods imported/exported while working out the arm s-length price from either operating income or operating expenditure of the assessee. The assessee is directed to submit fresh set of comparables. TPO is directed to examine the same, he may reject or include fresh comparables. Thus, the fresh comparability analysis is required to be conducted.

Summary

Issues Involved:

1. Determination of income and arm's length price (ALP) of international transactions.
2. Reference to Transfer Pricing Officer (TPO) and procedural fairness.
3. Application of Transfer Pricing Methods: Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP).
4. Compliance with Dispute Resolution Panel (DRP) directions.
5. Protective vs. Substantive Adjustments.
6. Interest levied under Sections 234B and 234C.

Detailed Analysis:

1. Determination of Income and ALP of International Transactions:

The Assessee, Sumitomo Corporation India Private Limited, filed its return of income for AY 2015-16 at Rs. 9,40,97,200/-, later revised to Rs. 19,70,11,810/- to reflect the Bilateral Advance Pricing Agreement (BAPA). The Assessing Officer (AO) determined the income at Rs. 44,17,63,259/- after making an addition of Rs. 24,47,51,449/- to the ALP of international transactions with Associated Enterprises (AEs).

2. Reference to TPO and Procedural Fairness:

The Assessee contended that the reference to the TPO was not in accordance with Section 92CA(1) and that no opportunity of being heard was granted. The TPO's adjustments were challenged on the grounds of procedural lapses.

3. Application of Transfer Pricing Methods:

The Assessee used TNMM with operating profit/operating expenses (OP/OPEX) as the Profit Level Indicator (PLI). The TPO disregarded this and applied the CUP method, comparing commission rates from transactions with AEs and non-AEs. The TPO's adjustments included a substantive addition of Rs. 21,31,41,987/- using the CUP method and a protective addition of Rs. 3,16,09,462/- using TNMM.

4. Compliance with DRP Directions:

The DRP directed that the substantive addition should be based on the CUP method if no appeal was filed against earlier ITAT orders. The TPO, however, made substantive adjustments using the CUP method and protective adjustments using TNMM, leading to a total addition of Rs. 24,47,51,449/-.

5. Protective vs. Substantive Adjustments:

The Assessee argued that both substantive and protective adjustments could not be made for the same income source. The ITAT held that the CUP method was not appropriate due to differences in transactions with AEs and non-AEs, and TNMM should be used as the most appropriate method.

6. Interest under Sections 234B and 234C:

The Assessee challenged the interest levied under Sections 234B and 234C, which was consequential and thus dismissed.

Judgment:

The ITAT found that the CUP method could not be applied due to significant differences in transactions with AEs and non-AEs. It upheld the use of TNMM with Berry ratio as the PLI, following earlier ITAT decisions. The TPO's substantive addition of Rs. 21,31,41,987/- using the CUP method was deleted. The protective addition of Rs. 3,16,09,462/- using TNMM was also found faulty due to the inappropriate inclusion of FOB value in operating expenses and income. The ITAT directed a fresh comparability analysis and adherence to TNMM with Berry ratio. The appeal for AY 2015-16 was partly allowed, and similar directions were given for AY 2016-17. The stay petitions became infructuous and were dismissed.