2019 (2) TMI 714 - AT - Income Tax

Transfer pricing adjustment - most appropriate method to be applied while bench marking international transactions of assessee - MAM selection - TNMM or CUP - availability of compare transaction - Held that - difference in functions performed, assets employed and risk assumed by the assessee under the activity of sale of manufactured items to the associated enterprise and non associated enterprise. - there were geographical differences in markets, wherein the assessee was exporting components to associated enterprises located in France, whereas the components sold in non associated enterprises were in India. - two transactions undertaken by the assessee were not comparable. Where the assessee was acting as contract manufacturer in respect of export of components to associated enterprises then, CUP method was not correct method to be applied to benchmark international transactions of the assessee. Following the ratio laid in Pr.CIT Vs. M/s. Amphenol Interconnect India P. Ltd. (2018 (3) TMI 536 - BOMBAY HIGH COURT), we hold that TNMM method is to be applied in this regard. The assessee has earned margins of 7.76%. The assessee had also furnished details and had selected certain comparables as functionally comparable whose mean margins worked out to 7.12%. TPO has not considered the said plea of assessee. So, in all fairness, we direct the AO / TPO to apply TNMM method to benchmark the international transactions of assessee and compare the margins shown by assessee with the mean margins of comparables which are functionally comparable. In this regard, the matter is being set aside to the file of AO / TPO for limited purpose to verify the stand of assessee and to determine arm s length price of international transactions. The grounds of appeal raised by assessee are thus, allowed.

Summary

Issues:
Transfer pricing adjustment made at ?98,65,593.

Analysis:
1. The assessee appealed against the transfer pricing adjustment made under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961. The grounds of appeal primarily challenged the additions proposed by the Transfer Pricing Officer (TPO) under section 92CA of the ITA, 1961 amounting to ?98,65,593 to the taxable income of the assessee company.

2. The TPO applied the Comparable Uncontrolled Price (CUP) method instead of the Cost Plus Method used by the assessee for certain products sold to associated enterprises. The TPO questioned the price difference between sales to associated enterprises and third parties, rejecting the explanations provided by the assessee regarding volume differences, marketing efforts, and other factors.

3. The dispute revolved around the appropriateness of the CUP method and the application of the TNMM method for benchmarking international transactions. The assessee argued that the CUP method was not suitable due to pre-agreed prices with non-associated enterprises and differences in functions, assets, and risks involved in sales to associated and non-associated entities.

4. The Tribunal analyzed the functions performed, assets employed, and risks assumed by the assessee in selling manufactured items to associated and non-associated entities. Following the principles laid down by the Hon’ble Bombay High Court in similar cases, the Tribunal held that the TNMM method was more appropriate in this scenario.

5. The Tribunal directed the Assessing Officer/TPO to apply the TNMM method to benchmark the international transactions and compare the margins with functionally comparable comparables identified by the assessee. The matter was remanded to verify the stand of the assessee and determine the arm's length price of international transactions using the TNMM method.

6. Ultimately, the Tribunal allowed the grounds of appeal raised by the assessee, leading to the appeal being allowed in favor of the assessee against the transfer pricing adjustment made by the TPO.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's decision regarding the transfer pricing adjustment, method selection, and the application of the TNMM method for benchmarking international transactions.