2022 (9) TMI 867 - AT - Income Tax

TP Adjustment - MAM Adjustment - ALP adjustment - Comparable Uncontrolled Price (CUP) method adopted as the MAM for the purchases and the CPM adopted by the assessee for the sales made to the AEs - HELD THAT - As substantiated that the price of imports from the group companies will have impact on the export pricing charged to the group companies. This is also evident from the Cost Accountant certificate where the per unit meter cost of the elastic in respect of the goods supplied to the AE is lower than the per unit meter cost of the elastic supplied to unrelated parties. Unlike the CUP method, TNMM does not require that comparable companies as to manufacture exactly the same product as that manufactured by the tested party. In TNMM what is to be seen is the functional comparability and not the product comparability. Further, it is observed that the Ld. AR has not objected to the comparables made by TPO under TNMM, but the assessee has come up with a set of 7 comparables under TNMM wherein the average OP/OC works out to 2.83%. As observed from the financials submitted by the AR that 71% of the elastic produced during the FY has been exported to AEs. AR also in his submissions accepted that the production price is similar and the ultimate finished goods are similar in properties and hence are comparable. Since the ultimate finished goods are similar in nature and properties, the submission of AR contradicts on the fact that the price per meter charged for AEs is far below the price per meter charged to non-AEs, where the difference is significant. TNMM adopted by the Ld. Revenue Authorities would be Most Appropriate Method for determining the ALP of the international transactions entered into by the assessee with the AE. We do not find any infirmity in the order of the DRP on this issue and the same is confirmed. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing.
2. Adjustment to the Arm's Length Price (ALP).
3. Validity of the Cost Plus Method (CPM) and Comparable Uncontrolled Price (CUP) method.

Issue-Wise Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing:
The primary issue in both appeals was the determination of the MAM for assessing the ALP of international transactions. The assessee argued that the CUP method should be used for purchases and the CPM for sales to Associated Enterprises (AEs). The assessee contended that purchases from AEs were made on a back-to-back basis and supported by third-party quotations. However, the Departmental Representative (DR) pointed out that the assessee was purchasing major raw materials only from AEs and not from third parties. The Tribunal concluded that the Transactional Net Margin Method (TNMM) was the most appropriate method due to the interlinked nature of import and export transactions and the significant difference in pricing between AE and non-AE transactions.

2. Adjustment to the Arm's Length Price (ALP):
The Transfer Pricing Officer (TPO) determined an ALP adjustment of Rs. 2,79,17,979/- for AY 2012-13. The assessee objected to the comparables used by the TPO but proposed an alternative set of comparables under TNMM, which showed an average Profit Level Indicator (PLI) of 2.83%. The Tribunal upheld the TPO's adjustment, noting that the assessee did not dispute the Arm's Length Margin determined by the TPO using the comparables selected by the assessee itself. The Tribunal found that the price of imports from group companies impacted the export pricing to group companies, justifying the TPO's approach.

3. Validity of the Cost Plus Method (CPM) and Comparable Uncontrolled Price (CUP) Method:
The assessee justified the use of CPM for sales to AEs, arguing that it was appropriate for benchmarking transactions involving significant value addition. The DR countered that the average selling price to AEs was significantly lower than to non-AEs, and the cost allocation in the Cost Accountant's Certificate was not scientific. The Tribunal found that the CUP method was not applicable due to the significant proportion of sales to AEs and the interlinked nature of import and export transactions. The Tribunal also noted discrepancies in the pricing and cost allocation for AE and non-AE transactions, leading to the conclusion that TNMM was the most appropriate method.

Conclusion:
The Tribunal dismissed the appeals for both AY 2012-13 and AY 2013-14, confirming the TPO's use of TNMM as the MAM and the ALP adjustments. The Tribunal found no infirmity in the DRP's order and upheld the adjustments made by the Revenue Authorities. The appeals were dismissed on the grounds that the assessee's methods and justifications were not in accordance with the law and the facts of the case.