2024 (4) TMI 253 - AT - Income Tax

TP Adjustment - selection of most appropriate method (MAM) - Resale Price Method or Transactional Net Margin Method - Introduction of Fresh Comparables - Removal of 3% Filter - it is also the claim that if the Transactional Net Margin Method is applied PLI of the assessee is 6.12% and PLI of the comparable is 5.41% and even otherwise no adjustment can be made. HELD THAT - In subsequent years the assessee itself has adopted the transactional net margin method as the most appropriate method. CIT A held that resale price method is the most appropriate method but looking at the subsequent adoption of most appropriate method of transactional net margin method by the assessee itself, he computed the arm's-length price of the international transaction adopting the transactional net margin method. Therefore now the grievance of the learned assessing officer that the learned CIT A has held that the resale price method is the most appropriate method does not hold any water. Further we also do not decide ground number A of the appeal of the AO whether in such case what should be the most appropriate method as the method adopted by the learned transfer pricing officer of transactional net margin method has been upheld for deleting the addition by the learned CIT A. While computing the arm's-length price adopting the transactional net margin method, nine comparables were selected whose average PLI of operating profit/sales was 5.41% and the assessee's margin was 6.12%, the addition was deleted. DR objection is that the comparable is introduced by the assessee before theCIT A where in some of the cases very low margin of 1% and 2% is shown and therefore such low margin entities could not have been selected. However, he could not show that those entities are functionally not comparable with the assessee. May be in the comparability analysis some of the companies may have a lower margin but those have to be included in the comparability analysis if they are functionally comparable with the functions of the assessee. No infirmity in the order of the CIT A in deleting the addition of adjustment in arm's-length price of international transaction - Decided in favour of assessee.

Summary

Issues involved:
The judgment involves issues related to transfer pricing adjustment, adoption of the most appropriate method, introduction of fresh comparables, removal of filters, and reintroduction of comparables.

Transfer Pricing Adjustment:
The appeal was filed by the Asst. Commissioner of Income Tax against the appellate order passed by the Commissioner of Income-tax (Appeals). The main issue raised was regarding the rejection of the Transactional Net Margin Method (TNMM) by the TPO and the direction to adopt the Resale Price Method (RPM). The CIT (A) erred in holding RPM as the most appropriate method without appreciating the functional differences between the assessee and the comparables. The TPO had rejected the RPM due to the intensive marketing and distribution functions performed by the assessee, leading to the adoption of TNMM. The CIT (A) also introduced fresh comparables without offering an opportunity to the TPO, which was challenged by the AO.

Introduction of Fresh Comparables:
The CIT (A) accepted new comparables introduced by the assessee without detailed reasons, which was contested by the AO. The introduction of fresh comparables at the appellate stage without considering the TPO's filters and comments was a point of contention. The CIT (A) erred in accepting the new search data without proper justification, as it could lead to an endless exercise of bringing the ALP within a comparable range.

Removal of Filters and Reintroduction of Comparables:
The CIT (A) removed the filter regarding the AMP to sales ratio without appreciating the marketing and distribution functions performed by the assessee. Additionally, the reintroduction of comparables and application of filters by the CIT (A) were challenged by the AO, who argued that the comparables were not functionally comparable with the assessee.

Conclusion:
The judgment addressed the issues of transfer pricing adjustment, adoption of the most appropriate method, introduction of fresh comparables, removal of filters, and reintroduction of comparables. The CIT (A) upheld the Resale Price Method as the most appropriate method, considering the subsequent adoption of TNMM by the assessee. The introduction of fresh comparables and removal of filters were also discussed, with the final decision confirming the CIT (A)'s order and dismissing the AO's appeal.