2017 (7) TMI 352 - AT - Income Tax

TPA - rejection of CUP Method as the most appropriate method and following TNMM by the TPO - Hel that - As seen from the order of DRP, the assessee has only filed the purchase invoice relating to its purchase from its AE and also filed back to back invoice copies relating to AE purchasing to the tune of ₹ 286,289,140.43. However, the assessee had not substantiated that AE has not derived any benefit or mark up on the price charged by the vendor for supply of material to it (AE), which it has sold to the present assessee. Unless the assessee filed full details of financial statement to show that the assessee s AE has not derived any benefit, it is not possible to apply the CUP method. In view of this, in the interest of justice, we remit the issue regarding application of the method whether the CUP Method or TNMM as a most appropriate method, to the file of AO to see whether the AE derived any benefit or mark up on the price charged by the vendor for supply of raw materials to assessee s AE, which it has sold to assessee. - Appeal of assessee is partly allowed for statistical purposes.

Summary

Issues involved:
1. Rejection of CUP method and application of TNMM by the TPO.
2. Exclusion of liquidated damages from operating costs for PLI determination.
3. PLI calculation of a comparable company leading to a higher ALP.

Analysis:
Issue 1: The appeal challenged the rejection of the Comparable Uncontrolled Price (CUP) method and the adoption of the Transactional Net Margin Method (TNMM) by the Transfer Pricing Officer (TPO). The Assessee contended that they had provided evidence supporting the CUP method by submitting relevant purchase invoices from Associated Enterprises (AE). However, the TPO and Dispute Resolution Panel (DRP) found the evidence insufficient to justify the applicability of the CUP method. The DRP highlighted that the invoices alone did not establish that the AE did not benefit or markup the prices charged by the vendor. The Appellate Tribunal remitted the issue back to the Assessing Officer (AO) for further examination to determine if the AE derived any benefit or markup on the prices, emphasizing the need for additional financial statements to support the CUP method's application.

Issue 2: The Assessee sought the exclusion of liquidated damages from operating costs for the Profit Level Indicator (PLI) determination. This additional ground was admitted by the Tribunal, allowing for a review of the treatment of liquidated damages in the operating costs to ascertain their impact on the PLI calculation.

Issue 3: Another contention was the calculation of the PLI of a comparable company, TRF Limited, leading to a higher Arm's Length Price (ALP). The Tribunal did not provide specific details on the resolution of this issue in the summarized judgment, indicating a need for further examination or clarification in the detailed judgment.

In conclusion, the appeal was partly allowed for statistical purposes, with the Tribunal remitting the issue of method selection back to the AO for a more thorough assessment of the AE's benefits or markups, emphasizing the importance of supporting evidence in transfer pricing method applications.