2023 (4) TMI 1041 - AT - Income Tax

Upward transfer pricing adjustment - TPO did not accept the approach adopted by the Appellant in respect of payment towards Distribution Rights, Marketing Consultancy Fee for Marketing Consultancy Support Services, and payment towards IT Consulting Support Services - According to the TPO, no reply was received from the Appellant, thus he determined the ALP of the aforesaid three transactions as 'Nil' holding that the Appellant has failed to satisfy the need/benefit of the intra-group services, and rendition thereof - TPO has rejected the method adopted by the Appellant without assigning any reason and without granting sufficient opportunity to the Appellant - HELD THAT - We find merit in the contentions advanced by Appellant that neither the Assessing Officer nor the DRP has provided any reasoning for rejecting the TNMM which has been followed by the Appellant consistently and has been accepted for earlier years. No reasoning is given by the TPO and/or DRP while rejecting TNMM method and concluding that CUP Method is the most appropriate method. While rejecting objection raised by the Appellant, the DRP had concluded that the Appellant has failed to establish, both, the rendition of all the intra-group services the as well as the benefit derived by the Appellant from the same. Thus, there is disconnect in the reason given by the TPO for determining ALP of Intra-Group Services at 'Nil' and the reasons given by the DRP for rejecting the objections. TPO opposed admission of the additional evidence filed by the Appellant before DRP - While rejecting objection raised by the Appellant, the DRP had concluded that the Appellant has failed to establish, both, the rendition of all the intra-group services the as well as the benefit derived by the Appellant from the same. Thus, there is disconnect in the reason given by the TPO for determining ALP of Intra-Group Services at 'Nil' and the reasons given by the DRP for rejecting the objections As regards, the payment towards distribution rights, the Appellant has place on record the Agreement for Grant of Distribution Rights. The aforesaid agreement entitled the Appellant to receive commission from AEs in respect direct sales made by such AEs in India. Appellant had also placed on record details of commission income earned in respect of products sold by third parties in India which has been offered to tax by the Appellant. The Commission received by the Appellant has also been accepted to be at arm's length by the TPO. These aspects have not been considered by the TPO/DRP. DRP has also observed that the Appellant had failed to provide the details of cost incurred in relation to the service and allocation of the same to the Appellant. DRP has failed to consider the certificate from statutory auditors submitted along with the Note on IT Consulting Support Services as well as the summary of actual cost incurred filed along with the Note on Marketing Consultancy and Support Services. We hold that the DRP has failed to consider and/or appreciate the material on record. In the facts and circumstances of the present case, we deem it appropriate and in the interest of justice to remand the issue back to Assessing Officer/TPO for determination of ALP afresh. Ground No. 1 raised by the Appellant is allowed for statistical purposes

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Rejection of Transaction Net Margin Method (TNMM) by the Transfer Pricing Officer (TPO).
3. Sufficiency of opportunity and consideration of additional evidence by the TPO and Dispute Resolution Panel (DRP).

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The appellant challenged the assessment order which enhanced their income by INR 3,70,91,170/- by determining the ALP of payments made to Associated Enterprises (AEs) for distribution rights, IT support services, and marketing consulting and support services as Nil. The appellant argued that they provided sufficient evidence to justify these payments and their economic benefits. The TPO had proposed an upward adjustment of INR 3,70,91,170/-, later corrected to INR 2,47,90,050/-, which was confirmed by the DRP.

2. Rejection of Transaction Net Margin Method (TNMM) by the Transfer Pricing Officer (TPO):
The appellant used TNMM to determine the ALP for various transactions, including payments for distribution rights, IT consulting & support services, and marketing consultancy fees. The TPO rejected TNMM for these specific transactions and instead used the Comparable Uncontrolled Price (CUP) method, determining the ALP as Nil. The DRP upheld this approach, stating that ALP for each international transaction should be determined separately and that a composite approach is not permitted.

3. Sufficiency of Opportunity and Consideration of Additional Evidence by the TPO and DRP:
The appellant contended that the TPO did not provide sufficient opportunity to present their case and did not consider the evidence submitted. The TPO issued a show-cause notice with a short response time, which the appellant could not meet due to intervening holidays. The TPO proceeded with the assessment without considering the appellant's submissions. The DRP also rejected the appellant's objections without providing adequate reasoning. The appellant provided additional evidence to the DRP, which included detailed cost computations, agreements, and invoices to substantiate the payments made to AEs. The TPO, in the remand report, acknowledged the receipt of additional evidence but maintained that the appellant failed to establish the benefit derived from the services.

Judgment:
The Tribunal found merit in the appellant's contention that neither the TPO nor the DRP provided adequate reasoning for rejecting the TNMM method, which had been consistently followed and accepted in previous years. The Tribunal noted the lack of coherence in the TPO and DRP's orders and the failure to consider the additional evidence provided by the appellant. Consequently, the Tribunal remanded the issue back to the Assessing Officer/TPO for a fresh determination of the ALP, instructing them to consider all the documents and evidence submitted by the appellant. The Tribunal emphasized that the onus is on the appellant to demonstrate that TNMM is the most appropriate method and that the transactions are at arm's length. The appeal was allowed for statistical purposes, and the Assessing Officer/TPO was directed to grant sufficient opportunity for the appellant to be heard.

Order Pronounced on 10.02.2023.