2024 (10) TMI 1283 - HC - Income Tax

TP Adjustment - MAM determination - TNMM v/s Berry ratio - decision of the TPO to reject the TNMM with Berry ratio (GP/VAE gross profit/value added expenses) as the most appropriate method for determining the ALP - HELD THAT - A change in the approach of assessment of tax, absent any statutory change, leads to uncertainty as to the cash flow/fund flow, which are the lifelines of commercial enterprises. Thus, unless there are cogent reasons to discard the method for transfer pricing adopted in the earlier assessment years, the TPO was required to follow the method consistently adopted for determining the ALP in prior years. We find no infirmity with the decision of the Tribunal in faulting the TPO for discarding the TNMM for determining the ALP as consistently followed in the past six assessment years (AYs 2009-10 to 2014-15), without sufficient reason. We concur with the Tribunal s view that the DRP had erred in finding that the TPO had provided justification for rejection of the TNMM. Thus, the Tribunal has rightly concluded that the TPO s decision to reject TNMM as the most appropriate method was without reasons. TPO s decision to adopt the residual method any other method under Rule 10B (1) (f) of the Rules - Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only if none of the other methods are considered as the most appropriate method. However, as noted above, the TPO had provided no reasons for rejecting TNMM, which had been used in earlier years. The TPO had also not discussed the applicability of any other methods. Tribunal had referred to the Guidelines issued by the Institute of Chartered Accountants of India (hereafter the Guidelines) in regard to use of Other method under Rule 10AB of the Rules. Guidelines rightly observe that the Rule 10AB of the Rules does not describe any methodology but provides flexibility to determine the price in complex transactions where third party comparable prices/transactions may not exist. The said method would be most appropriate in cases where the other methods are found to be inapposite on account of difficulties in obtaining comparable data on account of uniqueness of the transactions, which are to be benchmarked. It is difficult to accept that a business model that entails providing marketing support on commission basis is not unique or one that would warrant rejecting the TNMM. Objection to the comparables used by the TPO for determining the ALP - A Non-Compete Arrangement is clearly not similar to the transaction of purchase of hardware, which is the international transaction to be benchmarked. It is also noticed that the transaction at Serial no.3 is in relation to educational services, which admittedly is not similar to the international transactions being benchmarked. In the circumstances, this Court had called upon Revenue to explain the similarity between the transactions used as comparables and those that were to be benchmarked. However, the counsel fairly stated that he could not. Assessee had selected a set of four comparable transactions and used the TNMM with OP/VAE (Operating Profit / Value Added Expenses) as well as Berry ratio (gross profit / value added expenses) as PLI s. The computation of the assessee s PLI is significantly higher than the mean PLI of the comparable entities. In addition, the assessee had also furnished benchmarking studies of other entities engaged in trading by deleting the value of stocks and working capital to corroborate that the international transactions were at ALP. No substantial question of law arises in the present appeal.

Summary

Issues Involved:

1. Rejection of the Transactional Net Margin Method (TNMM) by the Transfer Pricing Officer (TPO).
2. Adoption of the "Other Method" under Rule 10B(1)(f) of the Income Tax Rules.
3. Selection of comparables by the TPO.
4. Consistency in the method for determining the Arm's Length Price (ALP) across assessment years.
5. Justification for rejecting the TNMM and adopting the "Other Method."
6. The Tribunal's decision on the comparables used by the TPO and accepted by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Rejection of the Transactional Net Margin Method (TNMM):

The primary issue was the TPO's rejection of the TNMM, which had been consistently used by the assessee for determining the ALP from assessment years 2009-10 to 2014-15. The Tribunal found that the TPO did not provide sufficient reasons for rejecting the TNMM. The Tribunal held that merely finding flaws in the comparables used by the assessee does not justify rejecting the TNMM as the most appropriate method. The Tribunal emphasized that TNMM had been consistently followed in prior years, and the TPO's decision to reject it without substantial reasons was unjustified.

2. Adoption of the "Other Method" under Rule 10B(1)(f):

The TPO adopted the "Other Method" under Rule 10B(1)(f) without providing reasons for discarding the other five methods specified in the Rule. The Tribunal noted that the TPO did not discuss the applicability of any other methods before resorting to the "Other Method." The Tribunal referred to the Guidelines issued by the Institute of Chartered Accountants of India, which state that the "Other Method" should be used only when the other methods are inapposite due to the uniqueness of the transactions. The Tribunal found that the TPO's decision to adopt the "Other Method" was without proper justification.

3. Selection of Comparables by the TPO:

The Tribunal found fault with the comparables selected by the TPO, noting that some of the transactions used as comparables were not similar to the international transactions being benchmarked. For instance, the Tribunal observed that a Non-Compete Agreement and transactions related to educational services were not comparable to the assessee's transactions. The Tribunal also noted inconsistencies in the DRP's acceptance and rejection of certain comparables. The Tribunal concluded that some of the comparables used by the TPO and accepted by the DRP were inappropriate.

4. Consistency in the Method for Determining ALP Across Assessment Years:

The Tribunal highlighted the importance of consistency in the method used for determining the ALP across different assessment years. The Tribunal referred to the Supreme Court's decision in M/s Radhasoami Satsang v. Commissioner of Income Tax, which emphasized that, in the absence of any material change, the revenue should not take a different view from what had been decided in earlier proceedings. The Tribunal found that the TPO's decision to change the method without substantial reasons was contrary to the principle of consistency.

5. Justification for Rejecting TNMM and Adopting the "Other Method":

The Tribunal found that the TPO did not provide any reasons for rejecting the TNMM, which had been used in earlier years. The Tribunal noted that the TPO's order did not set out any reasons for rejecting the TNMM, and the TPO's findings regarding the selection of comparables were not grounds for rejecting the TNMM. The Tribunal concluded that the TPO's decision to reject the TNMM and adopt the "Other Method" was without justification.

6. The Tribunal's Decision on the Comparables Used by the TPO and Accepted by the DRP:

The Tribunal found that some of the comparables used by the TPO and accepted by the DRP were inappropriate. The Tribunal noted that the DRP had accepted the assessee's objection to certain comparables but had rejected others without proper justification. The Tribunal found that the TPO's selection of comparables was flawed and that some of the transactions used as comparables could not have been adopted.

In conclusion, the Tribunal upheld the assessee's contention that the TNMM was the most appropriate method for determining the ALP and found that the TPO's decision to reject it was without sufficient reason. The Tribunal also found fault with the comparables selected by the TPO and the DRP's decision to accept some of them. Consequently, the Tribunal dismissed the Revenue's appeal, finding no substantial question of law arising in the present case.