2018 (5) TMI 848 - AT - Income Tax

Addition on transfer pricing adjustment in the international transaction of Management group cost - MAM - CUP method - Held that - It is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. Thus set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction, primarily, under the CUP method. In case, the TPO finds that the CUP method cannot be applied either due to non-availability of the relevant data or for some other genuine reasons, he is free to apply any other appropriate method for a fresh determination of the ALP of the international transaction of Management Group cost .

Summary

Issues Involved:
1. Confirmation of addition on account of transfer pricing adjustment in the international transaction of 'Management group cost' for assessment years 2008-09, 2009-10, and 2012-13.
2. Determination of the most appropriate method for benchmarking the 'Management group cost' transaction.
3. Separate benchmarking of 'R&D assistance cost' for assessment year 2012-13.

Detailed Analysis:

Issue 1: Confirmation of Addition on Account of Transfer Pricing Adjustment
Assessment Year 2008-09:
The assessee, an Indian subsidiary of Atotech B.V., reported an international transaction of 'Cost sharing expenses paid,' which included 'Management group cost' of ?4,55,25,620/-. The Transfer Pricing Officer (TPO) rejected the Transactional Net Margin Method (TNMM) used by the assessee and instead applied the Comparable Uncontrolled Price (CUP) Method. The TPO concluded that the services were either not received or were duplicate, determining the ALP to be nil. The CIT(A) upheld this view, leading to the assessee's appeal.

The Tribunal noted that the assessee provided a list of services received and technical materials, contradicting the authorities' stance that no services were availed. The Tribunal referenced the Punjab & Haryana High Court's decision in Knorr-Bremse India P. Ltd., which stated that the arm's length price (ALP) determination is not contingent on profitability. The Tribunal thus held that the benefit test applied by the authorities was inappropriate.

The Tribunal also addressed whether the payment was under a Cost Contribution Agreement (CCA) or for intra-group services. It referred to a previous Tribunal decision that remanded the issue to the TPO for further examination. Consequently, the Tribunal set aside the CIT(A)'s order and remitted the matter to the AO/TPO for fresh determination, aligning with previous Tribunal directions.

Assessment Year 2009-10:
The facts and circumstances were similar to those of 2008-09. The Tribunal followed its previous decision, setting aside the CIT(A)'s order and remitting the matter for fresh determination.

Assessment Year 2012-13:
Apart from the 'Management group cost,' the TPO also recommended adjustments for 'R&D assistance cost.' The Tribunal, following its decision for the preceding years, remitted the matter for fresh determination of both 'Management group cost' and 'R&D assistance cost.'

Issue 2: Determination of the Most Appropriate Method
The Tribunal examined the applicability of the TNMM and CUP methods. The assessee aggregated all international transactions and applied the TNMM, which the TPO rejected in favor of the CUP method. The Tribunal upheld the TPO's rejection of the aggregation approach, citing the High Court's criteria in Knorr Bremse India (P) Ltd. for closely linked transactions.

The Tribunal emphasized that the CUP method is preferred for determining the ALP of an international transaction due to its direct comparison approach. However, the TPO failed to provide comparable uncontrolled instances for the CUP method. The Tribunal remitted the matter to the AO/TPO for fresh determination, primarily under the CUP method, with the provision to use another appropriate method if necessary.

Issue 3: Separate Benchmarking of 'R&D Assistance Cost' (Assessment Year 2012-13)
For assessment year 2012-13, the Tribunal noted the TPO's recommendation for transfer pricing adjustment in 'R&D assistance cost' in addition to 'Management group cost.' The Tribunal, following its approach for the earlier years, remitted the matter for fresh determination of the ALP for both transactions.

Conclusion:
The Tribunal set aside the orders of the CIT(A) for all three assessment years and remitted the matters to the AO/TPO for fresh determination of the ALP of the international transactions, primarily under the CUP method. The Tribunal emphasized the need for proper comparable instances and allowed the AO/TPO to consider other appropriate methods if necessary. The appeals were allowed for statistical purposes.