2024 (4) TMI 942 - HC - Income Tax

TP Adjustment - selection of MAM Most Appropriate Method - Assessee had adopted Resale Price Method ( RPM ) for import of coal and Transactional Net Margin Method ( TNMM ) for import of pulses from its Associate Enterprise ( AE ) for determining Arms Length Price ( ALP ) - Assessee had also exported rice to its AE and followed TNMM to ascertain ALP - ITAT has held that choice of method is not an unfettered choice of the taxpayer, but has to be exercised on touchstone of principles governing Most Appropriate Method ( MAM ) as prescribed u/s 92C(1) of the Act and the TPO has overriding power of course correction as per Section 92C(3) of the Act. HELD THAT - Whenever both methods, i.e., CUP as well as TNMM can be applied, the traditional transaction methods are to be preferred over traditional profit methods. He thereafter proceeded to apply the CUP method and conducted a search on the Bloomberg database to find the sale price of rice. Without ascertaining or explaining in detail whether the rates were for products exported from India or from any other country or specifying whether the rates relate to controlled or uncontrolled transactions or whether it relates to retail or wholesale market, the TPO simply proceeded on the basis of Bloomberg database. In fact Assessee had even provided the rates accepted by the Indian Custom s Department for export of rice and requested that the same be considered for CUP analysis as the same would be more reliable. Assessee also submitted that it realized more price on exports than the rates quoted by the Custom Authorities. The TPO without explaining as to why he wanted CUP method to be followed and not the TNMM followed by us as Assessee and without clarifying whether the rates applied were for products exported from India or any other country or whether it related to controlled or uncontrolled transactions or retail or wholesale or as to why the Custom s rates are not acceptable, proceeded to fix the ALP purely relying on the Bloomberg database that was available with them. DRP also did not accept Assessee s objections in its entirety. The ITAT accepted that these were the mistakes in the order of TPO, inasmuch as the TPO without realizing the factual aspects, simply rejected the method adopted by Assessee. It is also recorded that Assessee s contentions that Bloomberg database was not reliable or that Assessee s export price was more than the Indian Custom s quoted rate and accordingly, exports are at ALP even under CUP method has not been controverted by the Departmental Representative. No reason to find fault with the conclusion arrived at by the ITAT. No substantial questions of law, therefore, arise. Appeal dismissed. ITAT justification in stating that CUP is most appropriate method for bench-marking the transaction of import of minerals - HELD THAT - ITAT accepted the contentions of Assessee that it had compared its import rates of coal imported from a country against the indices published by the agencies of the same country. ITAT also accepted that the rates are generally declared for a particular quality available in that country and the same quality should have been imported by Assessee and hence, it cannot be presumed that the price quoted does not take into account ash moisture content. The ITAT also rejected the reasons given by the TPO that Assessee has made arbitrary adjustment to the prices quoted by the indices with the intention to bring the same to the tolerance level of /- 5%. It accepted the scientific calculation given by Assessee to arrive at the prices. The ITAT has arrived at its conclusion on factual basis with valid reasons. No substantial questions of law arise.

Summary

Issues Involved:
1. Appropriateness of Transfer Pricing Methods (TNMM vs. CUP)
2. Reliability and Acceptance of Data Sources (Bloomberg Database vs. Indian Custom's Rates)
3. Proportional Adjustments in Pricing (Kcal Value of Coal)

Summary:

Issue 1: Appropriateness of Transfer Pricing Methods (TNMM vs. CUP)

In Income Tax Appeal (IT) No. 1188 of 2018, the appellant challenged the ITAT's decision favoring the Assessee's use of the Transactional Net Margin Method (TNMM) over the Transfer Pricing Officer's (TPO) preference for the Comparable Uncontrolled Price (CUP) method for determining the Arms Length Price (ALP) of rice exports. The ITAT concluded that the TNMM was more appropriate and the TPO's one-to-one comparison was not suitable. The ITAT directed the Assessing Officer (AO) to delete the addition made on account of TP adjustment.

Issue 2: Reliability and Acceptance of Data Sources (Bloomberg Database vs. Indian Custom's Rates)

The TPO used the Bloomberg database to ascertain the export prices of rice, which the Assessee contested, suggesting that the Indian Custom's rates would be more reliable. The ITAT noted that the TPO failed to justify the preference for the Bloomberg data and did not address the Assessee's objections adequately. The ITAT found that the TPO did not provide a detailed explanation for rejecting the TNMM and relying solely on the Bloomberg database. The ITAT accepted the Assessee's contention that the Bloomberg database was not reliable and that the Assessee's export prices were at ALP even under the CUP method.

Issue 3: Proportional Adjustments in Pricing (Kcal Value of Coal)

In Income Tax Appeal (IT) No. 1204 of 2018, the Assessee used the CUP method for benchmarking the import transactions of minerals. The TPO rejected this method citing discrepancies in the quality and calorific value of coal. The ITAT examined the TPO's reasons and found them unsubstantiated. The ITAT accepted the Assessee's method of proportional adjustment based on calorific value (Kcal) and noted that the TPO's adverse inferences were drawn without proper analysis. The ITAT upheld that the Assessee's method was scientifically calculated and rejected the TPO's reasons for rejecting the CUP method for both coal and manganese imports.

Conclusion:

The High Court found no substantial questions of law in both appeals, upholding the ITAT's decisions. The appeals were dismissed, affirming the ITAT's acceptance of the TNMM and the Assessee's proportional adjustments in pricing.