2012 (12) TMI 606 - AT - Income Tax

Transfer pricing - Arm s length price - TNMM method versus CUP method - comparables - held that - if the composite income is taken into consideration then the assessee has earned more in contrast to the rates to which earlier third party has charged. While applying CUP Method, there could be internal CUP or external CUP. - The internal CUP could be available if the assessee or one of its group entities entered into comparable transaction with an unrelated party where the goods or services under consideration are same or similar. - On the other hand, in an external CUP, transaction between two independent enterprises involved comparable goods or services under comparable conditions. Here, in this case, the internal CUP, ANL Singapore cannot be applied as it is an AE having related party transactions. There are also no external CUP for making any comparison in the relevant year as the earlier agency agreement with the third party CMAPL had expired prior to September, 2003 and rates which were applicable in the earlier years cannot be made applicable in this year. Thus, the rates of the earlier agreement will not be appropriate parameter for determining the ALP for the international transaction undertaken by the assessee with its AE in the current assessment year. In these circumstances, the CUP Method fails in this case for benchmarking the ALP. Both the parties have agreed that TNMM Method should be most appropriate method for benchmarking the ALP. - TPO has neither examined the comparables nor the application of TNMM Method for benchmarking the ALP in relation to the international transactions. Even the CIT(A) has not called for any remand report from the TPO or the AO asking for any comment upon the comparables shortlisted by the assessee. The comparables have to be examined objectively and the TPO should be given an opportunity to rebut the same. - Matter remanded back to TPO, who will require the assessee to furnish comparables into similar line of business and activities and examine the same for benchmarking the ALP. Decided partly in favor of revenue.

Summary

Issues Involved:
1. Appropriateness of the method for determining Arm's Length Price (ALP) for international transactions.
2. Benchmarking of 'container control fees' and 'communication expenses' using Comparable Uncontrolled Price (CUP) method.
3. Applicability of Transactional Net Margin Method (TNMM) for determining ALP.
4. Composite income consideration versus individual stream income consideration for benchmarking ALP.

Issue-Wise Detailed Analysis:

1. Appropriateness of the method for determining Arm's Length Price (ALP) for international transactions:
The primary issue in the appeal was the determination of the most appropriate method for benchmarking the ALP of international transactions. The CIT(A) held that TNMM was the most appropriate method, contrary to the TPO and AO who adopted the CUP method. The Tribunal agreed that TNMM should be considered but noted that the TPO had not examined the comparables or the application of TNMM properly. Hence, the matter was restored to the TPO for fresh examination.

2. Benchmarking of 'container control fees' and 'communication expenses' using Comparable Uncontrolled Price (CUP) method:
The TPO observed that the assessee charged lower fees for 'container control fees' and 'communication expenses' compared to what an independent third party charged earlier. The TPO made adjustments based on this observation. However, the CIT(A) found that considering these fees in isolation was incorrect and that the entire composite income should be analyzed. The Tribunal noted that the internal CUP method could not be applied due to the lack of independent comparables and the fact that the earlier agreement rates were outdated.

3. Applicability of Transactional Net Margin Method (TNMM) for determining ALP:
The CIT(A) and the Tribunal agreed that TNMM was more appropriate due to the lack of suitable comparables for the CUP method. The CIT(A) relied on the assessee's TP Study Report, which showed a significant difference between the arithmetic mean of comparables' operating profit (14.94%) and the assessee's operating profit (133.43%). The Tribunal restored the matter to the TPO to re-examine the comparables and apply TNMM properly.

4. Composite income consideration versus individual stream income consideration for benchmarking ALP:
The assessee argued that the income from various streams should be considered as a composite activity rather than in isolation. The CIT(A) supported this view, noting that the assessee's overall income was higher than that of the independent third party. The Tribunal agreed that once TNMM is applied, the issue of considering composite income or individual streams would be resolved as TNMM is applied at the entity level.

Conclusion:
The Tribunal concluded that the appeal by the revenue is partly allowed for statistical purposes, and the matter is restored to the TPO for fresh determination of ALP using TNMM. The cross-objections by the assessee, mainly in support of the CIT(A)'s order, are also treated as partly allowed for statistical purposes. The TPO is directed to provide sufficient opportunity to the assessee for representing its case and to examine the comparables objectively.