2024 (10) TMI 1094 - HC - Income Tax

TP Adjustment - MAM selection - RPM or TNMM - assessee selected Resale Price Method (RPM) as the most appropriate method and adopted the ratio of gross profit to sales as the profit level indicator (PLI) - respect of other transactions, the assessee used transactional net marginal method (TNMM) as the most appropriate method - HELD THAT -Revenue s appeal could not have been rejected by following the decision in respect of AY 2004-05. Revenue is unable to point out any material difference in the facts obtaining in two years that would have a material bearing on the issue of TP adjustment. ITAT had produced the grounds as urged by the Revenue in its appeal against the order of CIT(A). The principal ground urged by the Revenue was that the CIT(A) had erred in deleting the addition. ITAT expressly noted in the impugned order that the submissions advanced by the DRP in respect of AY 2005-06 were reiteration of the submissions made in respect of its appeal in respect of AY 2004-05. This observation is not countered by the Revenue. To ascertain as to how the facts obtaining in AY 2004-05 are materially different from the facts as obtaining in the year 2005-06. One of the differences as mentioned in the appeal is that in AY 2004-05, the assessee had used TNMM with OP/OC as the PLI for benchmarking the international transaction. Assessee had also used its foreign associated enterprise (ESYS Singapore) as a tested party. In variance to the said method, the assessee had used RPM as the most appropriate method with PLI of GP/Sales for benchmarking the transactions in AY 2005-06. We find that the said fact would be of little relevance considering that the TPO had rejected RPM as the most appropriate method and had used TNMM as the most appropriate method in both the years AY 2004-05 and 2005-06. CIT(A) had concurred with the TPO s decision to use TNMM as the most appropriate method. TPO had also rejected the use of foreign AE as a tested party and thus, in both the years, the assessee s foreign AE was not used as the tested party. No contention has been canvased on behalf of the Revenue regarding the rejection of the comparable entities.

Summary

Issues:
1. Impugning a common order of ITAT regarding assessment years 2004-05 and 2005-06.
2. Deletion of an addition on account of arm's length price adjustment.
3. Benchmarking of international transactions related to purchase of computer hardware components.
4. Selection of appropriate transfer pricing method.
5. Dispute over transfer pricing adjustment and comparables.
6. Appeal against CIT(A)'s decision before ITAT.
7. Rejection of Revenue's contentions by ITAT.
8. Difference in facts between AY 2004-05 and AY 2005-06.

Analysis:
The High Court judgment pertains to an appeal by the Revenue against a common order of the Income Tax Appellate Tribunal (ITAT) concerning assessment years 2004-05 and 2005-06. The dispute primarily revolves around the deletion of an addition of Rs. 14,29,21,585/- on account of arm's length price (ALP) adjustment made by the Transfer Pricing Officer. The case involves international transactions related to the purchase of computer hardware components by the assessee from its associated enterprise. The Assessing Officer referred the matter to the Transfer Pricing Officer for determining the ALP, leading to a disagreement on the appropriate transfer pricing method to be used. The assessee favored the Resale Price Method (RPM) for hardware purchases and Transactional Net Margin Method (TNMM) for other transactions, while the TPO proposed TNMM for all transactions.

The crux of the issue lies in the benchmarking of transactions with the associated enterprise. The TPO's rejection of RPM in favor of TNMM resulted in an ALP adjustment, which the CIT(A) partially upheld, considering only certain entities as comparables. The ITAT, however, rejected the Revenue's contentions for both assessment years. The Revenue argued that the facts differed between the two years, but the Court found no material variance affecting the transfer pricing adjustment issue. Notably, the Revenue failed to challenge the rejection of comparable entities.

The Court highlighted the consistency in the TPO's approach of using TNMM for both years and the rejection of the foreign associated enterprise as a tested party. Ultimately, the Court dismissed the Revenue's appeal, emphasizing the lack of substantial legal questions arising from the case due to the absence of material differences between the facts of the two assessment years. The judgment underscores the importance of consistency in transfer pricing methods and the need for concrete evidence to challenge transfer pricing adjustments.