2018 (4) TMI 1963 - HC - Income Tax

TP Adjustment - method for ALP determination - selection MAM - CUP v/s TNMM - HELD THAT - In the present case the CUP method was rejected as an appropriate method having regard to the fact that it unduly restricted the choices of the Revenue. TNMM was considered to be a more appropriate method where greater choice was available. The assessee s contention in this respect that the supplies made to the Metro Rail alone ought to be considered is equally unpersuasive. The most appropriate method or the transactional similarity does not dictate that two entities alike in all particulars can only be considered for comparative purposes. As has been repeatedly emphasized in judicial decisions and recognized by rule making authorities it is the functional similarity which is to be taken into account. Having regard to these the question Nos.1 and 2 urged do not arise. Admit. The following questions of law arise for consideration 1. Whether on the facts and in the circumstances of the case the Tribunal erred in law in upholding the action of the TPO in cherry-picking comparables and considering Titagarh and Texmaco as comparable companies for undertaking benchmarking analysis of international transaction of main line (MLN) segment applying TNMM not appreciating that the said companies did not satisfy the test of comparability as provided in Rule 10B(2) of the Rules? 2. Whether on the facts and in the circumstances of the case the Tribunal erred in law in upholding the action of the TPO in deleting the comparables proposed by the appellant viz. Braithwaite and Bharat Wagon (without prejudice and in response to the additional comparables selected by the TPO) completely ignoring that the same are identical in functional profile to the comparables introduced by the TPO for undertaking benchmarking analysis of international transaction of main line (MLN) segment applying TNMM not appreciating that the said companies satisfy the test of comparability as provided in Rule 10B(2) of the Rules? 3. Whether on the facts and in the circumstances of the case the Tribunal erred in law in upholding the addition made by the TPO on account of intra-group services related to management support by President and his team human resources Six Sigma and operation and quality and other services received by the appellant from its associated enterprises on the erroneous reasoning that such services rendered by the AEs are in the nature of shareholders activities and of no economic and commercial value to the business of the appellant? Issue notice of appeal.

Summary

Issues involved:
1. Rejection of the CUP method by revenue authorities for ALP determination.
2. Appropriateness of the TNMM method over the CUP method.
3. Selection of comparables for benchmarking analysis.
4. Addition made by the TPO on account of intra-group services.

Analysis:

1. The High Court opined that the question of rejecting the CUP method for ALP determination does not arise. It emphasized that the appropriateness of a method under Section 92C and Rule 10B(1) involves factual analysis by revenue authorities, and unless there is a glaring distortion in method adoption, it does not give rise to a question of law. The court noted that the TNMM was considered more appropriate than the CUP method in this case, as it provided greater choice to the revenue authorities. The functional similarity, not just transactional similarity, is crucial in determining the most appropriate method.

2. The court addressed specific questions of law raised, including the selection of comparables for benchmarking analysis. It questioned the comparability of companies like Titagarh and Texmaco chosen by the TPO, and the deletion of comparables proposed by the appellant without considering their functional profile. The court highlighted the importance of satisfying the test of comparability as provided in Rule 10B(2) of the Rules for benchmarking analysis using the TNMM method.

3. The court also examined the addition made by the TPO on account of intra-group services, emphasizing the need to assess the economic and commercial value of such services to the business of the appellant. It raised concerns about the reasoning used by the TPO in categorizing the services as shareholders' activities without economic significance. The court indicated that a thorough analysis of the nature and impact of the services on the business is essential for a fair assessment.

In conclusion, the High Court's judgment delves into the intricacies of transfer pricing methods, comparability analysis, and the economic value of intra-group services. It underscores the importance of factual accuracy, functional similarity, and economic relevance in determining the most appropriate method for ALP determination and conducting benchmarking analysis.