2021 (10) TMI 877 - AT - Income Tax

TP Adjustment - selection of MAM - assessee applied the CUP as the most appropriate method, which got repelled at the hands of the authorities below - HELD THAT - The assessee purchasing similar products from non-AEs or a third party in India purchasing similar goods in an uncontrolled situation would have constituted the next best comparable uncontrolled price(s). Neither the best nor the next best comparable uncontrolled transactions are available and further, the assessee has provided no basis to crease out the effect of geographical differences in the transaction so chosen as comparable in terms of rule 10B(3). In such circumstances, we fail to comprehend as to how the sale transactions made by German AE to non-German AEs constitute valid comparable uncontrolled transactions insofar as the assessee s purchases of raw material from Spain, USA, China and Germany are concerned. Remaining part of the international transaction of purchase of finished goods. It is seen that the assessee made finished goods purchases from its German AE as well as Italian AE. In order to benchmark these transactions, the assessee relied on a transaction of sale made by its Italian AE to German non-AE - As fairly conceded that no comparable data of the sales made by German AE to non-AE is available. Geographical differences, as noted above, do not justify the adoption of the price charged by Italian AE from a German non-AE as a good comparable for the purposes of benchmarking the international transactions in India. The raison d etre given in the context of purchase of raw materials supra applies with equal force to the purchase of finished goods from the AEs for which no worthwhile comparable uncontrolled transaction is available. No separate argument was advanced qua the remaining part of the transaction under consideration, namely, Purchase of Stores, spares and consumables from the AEs.We, therefore, approve the view point taken by the authorities below to the effect that the CUP is not the most appropriate method in the facts and circumstances of the case. Application of the TNMM - transfer pricing addition proportionate to the international transactions - HELD THAT - As AR submitted that if the CUP method is not to be adopted as the most appropriate method, then he has no grievance against the application of the TNMM or any of its other aspects except restricting the transfer pricing addition proportionate to the international transactions. The issue of proportionate adjustment is fairly settled by a judgment of the Hon ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. 2017 (6) TMI 1240 - BOMBAY HIGH COURT holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. It is pertinent to mention that the Department s SLP against this judgment has since been dismissed by the Hon ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. 2018 (7) TMI 798 - SC ORDER . Similar view has been espoused by the Hon ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT and CIT Vs. Tara Jewels Exports (P). Ltd. 2015 (12) TMI 1130 - BOMBAY HIGH COURT . We, ergo, direct to restrict the transfer pricing addition only to the extent of international transaction under consideration. We restore the matter to the file of AO/TPO for re-determining the ALP of the international transaction of Purchase of raw material, sale of finished goods, spares and consumables under the TNMM but restricting the amount of transfer pricing adjustment only to the international transaction.

Summary

Issues Involved:
1. Whether the Comparable Uncontrolled Price (CUP) method is the most appropriate method for determining the Arm's Length Price (ALP) of the international transaction.
2. If the Transactional Net Margin Method (TNMM) is to be applied, whether the transfer pricing adjustment should be restricted to the international transactions only.

Issue-wise Detailed Analysis:

I. WHETHER CUP IS THE MOST APPROPRIATE METHOD:

The assessee, a company engaged in manufacturing car suspension products, applied the CUP method to demonstrate that its international transactions were at ALP. The Transfer Pricing Officer (TPO) rejected the CUP method, misinterpreting the purchase transactions as sales and instead adopted the TNMM. The Dispute Resolution Panel (DRP) corrected the TPO's misunderstanding but upheld the application of the TNMM.

The Tribunal examined the CUP method under Rule 10B(1)(a), which requires comparing the price paid in an international transaction with that in a comparable uncontrolled transaction, adjusting for any material differences. The assessee's purchases from AEs in Spain, USA, China, and Germany were compared with the price charged by the German AE to a German non-AE. However, the Tribunal found significant issues:

1. The assessee's comparison involved transactions from different geographical locations, which materially affect prices.
2. There was no comparable data for purchases from the Spanish, US, and Chinese AEs.
3. The volume of purchases from the German AE was minimal compared to its sales to German non-AEs.
4. The CUP method requires a high degree of comparability, including geographical and market conditions, which was not met in this case.

The Tribunal concluded that the CUP method was not the most appropriate due to the lack of comparable uncontrolled transactions in India and the inability to adjust for geographical differences.

II. IF TNMM IS TO BE APPLIED, THEN PROPORTIONATE ADJUSTMENT SHOULD BE MADE:

The Tribunal then addressed the alternative contention that the transfer pricing adjustment should be restricted to international transactions. The TPO had applied the ALP margin at the entity level, which included non-AE transactions. The Tribunal referred to the judgment of the Hon'ble jurisdictional High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd., which held that transfer pricing adjustments should be limited to international transactions. This view was supported by other judgments such as CIT Vs. Thyssen Krupp Industries Pvt. Ltd. and CIT Vs. Tara Jewels Exports (P) Ltd.

Based on these precedents, the Tribunal directed that the transfer pricing addition should be restricted only to the international transactions under consideration. The case was remanded to the AO/TPO for re-determining the ALP using the TNMM but limiting the adjustment to the international transactions.

Conclusion:

The Tribunal set aside the impugned order and restored the matter to the AO/TPO for re-determining the ALP of the international transaction of 'Purchase of raw material, sale of finished goods, spares and consumables' under the TNMM, restricting the transfer pricing adjustment to the international transactions. The appeal was partly allowed for statistical purposes.