2017 (8) TMI 1251 - AT - Income Tax

Transfer pricing adjustment - determining the ALP of the international transaction - TNMM method or RPM method - taking operating income into consideration - adjustment made with reference to the Comparables available of non-AE transactions change from one method to another method - Held that - the assessee is engaged in purchasing and reselling the same goods without any value addition, and as such, the RPM is the most appropriate method in such circumstances. Secondly, the Tribunal in earlier years has upheld the RPM as the most appropriate method. In the absence of any change in the facts and circumstances of the instant year vis- -vis the earlier years, we cannot order the switch over from the RPM to the TNMM. On going through the Annual accounts of the assessee-company, it is lucid that the transfer pricing adjustment has been made with reference to the figures which also include non-AE transactions. Also legally transfer pricing adjustment should be limited to the international transactions only. The Hon ble Delhi High Court in CIT vs. Keihin Panalfa Ltd. (2016 (5) TMI 203 - DELHI HIGH COURT), has held that the transfer pricing adjustment can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Similar view has been espoused by the Hon ble Bombay High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. (2015 (12) TMI 1076 - BOMBAY HIGH COURT). Thus, it is clear that the transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has made the addition on the basis of transactions even with non-AEs, we direct to restrict the addition only qua the international transactions. Thus we set aside the impugned order and remit the matter to the file of the Assessing Officer/TPO for accordingly redetermining the ALP of the international transaction afresh after allowing a reasonable opportunity of being heard to the assessee. Appeal is partly allowed for statistical purposes. The appeal is partly allowed for statistical purposes.

Summary

Issues:
1. Transfer pricing adjustment amounting to ? 48,90,27,914.

Analysis:
1. The appeal was against a final assessment order passed by the Assessing Officer regarding transfer pricing adjustment. The assessee, an Indian company, engaged in trading beauty products directly to customers. The controversy arose regarding the purchase of traded goods, and the Transfer Pricing Officer (TPO) determined an adjustment amounting to ? 48,90,27,914. The Dispute Resolution Panel and Assessing Officer upheld this adjustment, leading to the appeal.

2. The Tribunal noted that in the preceding years, the RPM was accepted as the most appropriate method for determining the arm's length price (ALP) for international transactions. The TPO had consistently chosen Modicare Ltd. as the sole comparable, which the Tribunal had approved. The Tribunal emphasized the importance of selecting comparables primarily engaged in direct sales with no significant value addition activities. The Tribunal's previous order was considered a precedent for the current case.

3. The contention to include companies selling similar products through a retail chain as comparables was rejected. The Tribunal highlighted that companies with different business models cannot be compared. The argument to switch to the Transactional Net Margin Method (TNMM) was also dismissed, as the RPM was deemed appropriate due to the lack of value addition in the assessee's business model.

4. The Tribunal directed that the transfer pricing adjustment should be limited to international transactions only, following legal precedents. The adjustment based on non-associated enterprise transactions was deemed impermissible. The matter was remitted to the Assessing Officer/TPO for redetermining the ALP of international transactions, giving the assessee an opportunity to be heard.

5. The appeal was partly allowed for statistical purposes, and the Tribunal set aside the impugned order, emphasizing adherence to the precedent set in the assessee's previous cases for determining the ALP of international transactions.