2023 (7) TMI 511 - HC - Income Tax

TP adjustment - MAM - methodology to be adopted while benchmarking the international transaction of respondent - TPO was of the view that CUP method was most appropriate method to be applied - HELD THAT - Since the transaction picked up for comparison by TPO was very negligible, on the basis of small sales made by respondent of similar components, CIT(A) held that there is no merit in applying the CUP method. CIT(A) also observed that the methodology adopted by respondent in applying CPM method had been accepted from AY 2008-09 to 2010-11 by the TPO himself and no adjustment has been made in the hands of respondent. The assessment orders for those assessment years are also on record. CIT(A) came to the conclusion, which was correctly upheld by the ITAT, that there was no merit in the order of TPO in applying the CUP method to benchmark the international transaction of export to AE in the hands of respondent. TP adjustment on receipt of commission from the AE - respondent in TP report had applied the CUP method for benchmarking the international transactions with its AE - Respondent had applied CUP method in all the years starting from 2006-07 to 2010-11. TPO for the assessment year under consideration, i.e., AY 2005-06 applied internal rate of return as the most appropriate method for benchmarking international transactions, but, in the succeeding years starting from AY 2006-07 to 2010-11, TPO had applied CUP method. CIT(A), therefore has rightly rejected the methodology adopted by TPO and ITAT has correctly upheld the findings of CIT(A). No substantial questions of law arise.

Summary

Issues:
The judgment involves the determination of the Arm's Length Price (ALP) of international transactions, specifically focusing on export sales and commission receipts, and the methodology to be adopted for benchmarking these transactions.

Export Sales Issue:
The respondent's export sales of Cold Rolled Electrical Steel to its Associated Enterprise (AE) were benchmarked using the Cost Plus Method (CPM). However, the Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price Method (CUP) and made adjustments. The Commissioner of Income Tax (Appeals) observed that the TPO's rejection of the CPM method lacked cogent reasons and the transactions considered under CUP were not in line with the Income Tax Rules. The CIT(A) deleted the addition, noting that the TPO's methodology was inconsistent with previous years where the CPM method was accepted.

Commission Receipt Issue:
Regarding the commission received from the AE, the respondent applied the CUP method for benchmarking, which was consistent across multiple years. The TPO, however, used the Internal Rate of Return (IRR) method for the relevant assessment year. The CIT(A) rejected the TPO's methodology, citing judicial decisions and consistency in applying the CUP method in subsequent years. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing the respondent's consistent approach.

Judgment Summary:
The High Court upheld the ITAT's decision to delete the adjustments made by the TPO on the ALP of international transactions, including export sales and commission receipts. The Court found no merit in the TPO's application of the CUP method, considering the respondent's historical use of the CPM method and the consistency in applying the CUP method for commission receipts. The Court dismissed the appeal, concluding that no substantial questions of law arose for consideration.