2017 (12) TMI 801 - AT - Income Tax

Transfer pricing adjustment - mechanism adopted by the TPO of applying the CUP method - CUP v/s TNMM - aggregation and application of the correct methods - Held that - TPO has simply computed ratio of the expenses of Royalty and Technical services fees to Sales of the comparables at 0.28% and, then, proceeded to apply such benchmark for determining the ALP of the two international transactions under consideration. In the entire episode, there is no reference to the price paid by the comparables as a yardstick for comparing with the price paid by the assessee. The approach adopted by the TPO, as approved by the DRP, does not conform to the prescription of rule 10B(1)(a) inasmuch as he sought to compare percentage of expenses to sales rather than the price paid under a comparable uncontrolled situation. Ergo, we cannot countenance the mechanism applied under the CUP method, which is not in consonance with the procedure prescribed under the relevant rule. Similar view has been taken by the Delhi Tribunal in the case of Gruner India Pvt. Ltd. vs. DCIT 2016 (6) TMI 1005 - ITAT DELHI . HC of the same case 2017 (1) TMI 389 - DELHI HIGH COURT did not disturb the overturning by the Tribunal of the similar mechanism adopted by the TPO of applying the CUP method and working out the transfer pricing adjustment by considering the Royalty and Technical services fee to Sales ratio of that assessee as well as the comparables. It is, therefore, held that the TPO did not correctly compute the ALP of the international transactions of Royalty and Technical Services fee under the CUP method. Thus set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for a fresh adjudication in the light of the guidance provided in the case of Gruner India Pvt. Ltd. (supra).

Summary

Issues Involved:
1. Addition of ?9,93,69,480/- on account of transfer pricing adjustment.
2. Application of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM) for determining Arm’s Length Price (ALP).
3. Aggregation versus segregation of international transactions for transfer pricing.

Detailed Analysis:

1. Addition of ?9,93,69,480/- on account of transfer pricing adjustment:
The primary issue in this appeal is the addition of ?9,93,69,480/- made by the Assessing Officer (AO) on account of transfer pricing adjustment. The assessee, a joint venture incorporated in India, engaged in manufacturing auto ancillaries, filed a return of income declaring 11 international transactions. The AO referred the determination of the arm’s length price (ALP) of these transactions to the Transfer Pricing Officer (TPO). The TPO accepted most transactions at ALP but disputed the payment of royalty and technical know-how fees, applying the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) used by the assessee. The Dispute Resolution Panel (DRP) partially upheld the TPO's approach but directed adjustments, resulting in the final addition of ?9,93,69,480/-.

2. Application of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM) for determining Arm’s Length Price (ALP):
The TPO applied the CUP method to benchmark the royalty and technical know-how fees transactions, computing a ratio of these fees to sales for comparable companies. This method was contested by the assessee, who argued for the TNMM approach, which considers the entity's overall profitability rather than specific transactions. The tribunal noted that the TPO’s application of the CUP method did not conform to Rule 10B(1)(a), which requires a direct comparison of prices paid for services in uncontrolled transactions. The TPO's method of comparing expense ratios to sales was deemed inappropriate as it did not align with the prescribed rule. The tribunal referenced the Delhi Tribunal's decision in Gruner India Pvt. Ltd. vs. DCIT, which similarly overturned a TPO's application of the CUP method, a decision upheld by the Delhi High Court.

3. Aggregation versus segregation of international transactions for transfer pricing:
The assessee argued that the TNMM should be applied on an aggregate basis, considering all international transactions together, rather than segregating the royalty and technical know-how fees. The tribunal reviewed the judgment of the Hon’ble jurisdictional High Court in Gruner India Pvt. Ltd., which remitted a similar issue back to the TPO for reconsideration. The High Court had directed the TPO to first determine whether aggregation of transactions was appropriate and then apply the correct method for determining the ALP. Following this precedent, the tribunal remitted the matter back to the AO/TPO to reconsider the aggregation versus segregation issue and to apply the correct method for determining the ALP of the disputed transactions, if segregation is deemed appropriate.

Conclusion:
The tribunal set aside the impugned order and remitted the matter to the AO/TPO for fresh adjudication, considering the precedent set by Gruner India Pvt. Ltd. The tribunal did not address further submissions on the CUP method's application, as the matter was being remitted for reconsideration of aggregation and the appropriate method for determining the ALP. The appeal was allowed for statistical purposes, and the order was pronounced in the open court on 13.12.2017.