2017 (7) TMI 996 - AT - Income Tax

TPA - selection of most appropriate method - ALP determination - Held that - As noted for the three years under consideration selection of most appropriate method is not in dispute, we deem it appropriate to refer to sub-Rule (2) of Rule 10C of the IT Rules, 1962 for the sake of clarity noting that since it is a recurring issue and that in the peculiar niche area of cosmetics there are multiple players in the limited market the persuasiveness of the arguments that the business model of direct sales or retail sales as far as the specific target customer base is concerned the business model of direct sales may not be a relevant criteria thus we make it clear that the issue has been left open to be decided as and when and if ever a challenged is posed to the application of RPM as the most appropriate method In order to take guidance from the Rules we deem it appropriate to refer to Rule 10C of the IT Rules wherein sub-Rule (1) of Rule 10C throws light on the criteria to be adhered to and makes it clear that for the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction, and which provides the most reliable measure of an arm s length price in relation to the international transaction or the specified domestic transaction, as the case may be. Thus though the issue may be of academic interest in the present proceedings we deem it appropriate to clearly and ambiguously set out that on the selection of the most appropriate method there is no finding given as the issue is not under challenge in the present proceedings. In view of the above detailed reasoning and the conclusion the issues are remitted back to the TPO in the respective years to comply with the aforesaid directions set out hereinabove.

Issues Involved:
1. Validity of the Assessing Officer's order.
2. Determination of arm's length adjustment by the Transfer Pricing Officer (TPO).
3. Jurisdictional error in referring the matter to the TPO.
4. Errors in the determination of arm's length price (ALP) for international transactions.
5. Selection of comparable companies for benchmarking.
6. Consistency in transfer pricing methodology across different assessment years.
7. Initiation of penalty proceedings under section 274 read with section 271 of the Income Tax Act.
8. Charging and computing interest under section 234B of the Act.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The assessee challenged the validity of the orders passed by the Assessing Officer (AO) for the assessment years 2009-10, 2010-11, and 2011-12. The orders were passed under section 143(3) read with sections 144C(13), 144C(1), and 144C(5) of the Income Tax Act. The Tribunal did not provide a specific finding on this issue as it was treated as a general ground.

2. Determination of Arm's Length Adjustment by the TPO:
The TPO made an arm's length adjustment to the assessee's international transactions, enhancing the returned income by ?14,29,24,000. The assessee argued that the TPO erred in using only one comparable company, Modicare Ltd, for benchmarking under the Resale Price Method (RPM) and disregarded the comparables selected by the assessee. The Tribunal found that the TPO's approach was not in compliance with Rule 10B of the Income Tax Rules, which requires adjustments for functional and other differences. The Tribunal directed the TPO to reconsider the adjustments and, if necessary, select additional comparables engaged in similar direct sales activities.

3. Jurisdictional Error in Referring the Matter to the TPO:
The assessee contended that the AO did not record any reasons for referring the matter to the TPO for computation of the arm's length price, as required under section 92CA(1) of the Income Tax Act. This ground was not pressed by the assessee during the proceedings.

4. Errors in the Determination of ALP for International Transactions:
The assessee argued that the TPO made several errors in determining the ALP, including:
- Using only one comparable company (Modicare Ltd) without considering product similarity.
- Rejecting the arm's length price determined by the assessee in its TP documentation.
- Applying inappropriate filters and thresholds for selecting comparables.
- Not following a detailed search methodology, leading to cherry-picking of companies.

The Tribunal found merit in the assessee's arguments and directed the TPO to reconsider the selection of comparables and make necessary adjustments for differences in functions, assets, and risks.

5. Selection of Comparable Companies for Benchmarking:
The assessee objected to the selection of Modicare Ltd as the sole comparable, arguing that it had a diverse product portfolio, included service income, and had significant differences in its functional profile and accounting practices. The Tribunal agreed that Modicare Ltd was not an appropriate standalone comparable and directed the TPO to consider additional comparables from the list of direct sellers in the market.

6. Consistency in Transfer Pricing Methodology Across Different Assessment Years:
The assessee argued that the transfer pricing methodology adopted in the previous years (2007-08 and 2008-09) was accepted by the tax authorities and should be consistently applied in the current years. The Tribunal rejected this argument, stating that mistakes made in earlier years cannot justify the retention of comparables in subsequent years if they fail the threshold level of functional comparability.

7. Initiation of Penalty Proceedings Under Section 274 Read with Section 271:
The assessee contended that the AO erred in initiating penalty proceedings for furnishing inaccurate particulars without recording adequate satisfaction. This ground was not pressed by the assessee during the proceedings.

8. Charging and Computing Interest Under Section 234B:
The assessee argued that the AO erred in charging and computing interest under section 234B of the Income Tax Act. This ground was not pressed by the assessee during the proceedings.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the TPO to reconsider the selection of comparables and make necessary adjustments for differences in functions, assets, and risks. The Tribunal emphasized the need for adherence to the statutory requirements under Rule 10B of the Income Tax Rules and rejected the argument for consistency based on previous years' mistakes. The appeals were remitted back to the TPO for compliance with the Tribunal's directions.

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