2016 (7) TMI 248 - AT - Income Tax

Transfer pricing adjustment - rejecting the comparable uncontrolled price (CUP) method as the most appropriate method applied by the appellant for benchmarking the international transactions entered with its AE - Held that - The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. The assessee is required to support the international transaction by authentic documents which may also include quoted prices. The assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of the coordinate bench. In the event assessee fails to adduce and support its transactions under CUP method or under the sixth method then ld TPO and AO are entitled to resort to other method of benchmarking and comparability analysis after granting assessee a proper opportunity of hearing. In view of this, we set aside ground of the appeal of the assessee holding that ld AO and TPO are directed to first benchmark the international transaction of the assessee by applying the CUP method. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing.

Issues Involved:
1. Assessment of business loss.
2. Rejection of Comparable Uncontrolled Price (CUP) method for benchmarking international transactions.
3. Application of Transactional Net Margin Method (TNMM) as the most appropriate method.
4. Penalty proceedings under Section 271(1)(c) of the Income Tax Act.
5. Validity of the assessment order.

Detailed Analysis:

1. Assessment of Business Loss:
The assessee contested the reduction of the assessed business loss from ?27,17,58,649/- to ?21,73,85,388/-. The Tribunal did not specifically address this issue in detail, focusing instead on the method of benchmarking international transactions.

2. Rejection of CUP Method for Benchmarking International Transactions:
The assessee used the CUP method to benchmark its international transactions, relying on data such as quotations from the Solvent Processors Association of India, third-party contracts, prices published by Platts and Coal Trader International Book, and custom data from shipping bills. The TPO rejected the CUP method, citing a lack of functional comparability and non-compliance with Rule 10D(3) of the Income Tax Rules. The CIT(A) upheld this rejection, emphasizing that transactions for comparison should be actual and not hypothetical.

Upon appeal, the Tribunal referred to its decision for AY 2006-07, where CUP was deemed the most appropriate method for trading transactions. The Tribunal reiterated that internal CUP data is preferable and emphasized that the assessee must provide reliable data for comparison. The Tribunal also acknowledged the use of quoted prices and external CUP data, provided they are authentic and reliable, referencing the Gujarat High Court's decision in CIT Vs. Adani Wilmar Ltd. and OECD BEPS Action Plan.

3. Application of TNMM as the Most Appropriate Method:
The TPO and CIT(A) applied the TNMM, arguing it better captured the business realities and broader functions of the assessee. The Tribunal, however, held that CUP should be the primary method for benchmarking trading transactions, with TNMM being a fallback if CUP data is insufficient. The Tribunal directed the TPO to first apply CUP and, if necessary, use TNMM or the sixth method retrospectively, as per the decision in Toll Global Forwarding India Pvt. Ltd. Vs. DCIT.

4. Penalty Proceedings under Section 271(1)(c):
The assessee's appeal against the initiation of penalty proceedings under Section 271(1)(c) was rendered moot by the Tribunal's decision to re-evaluate the benchmarking method. The Tribunal did not provide a detailed ruling on this issue.

5. Validity of the Assessment Order:
The assessee challenged the validity of the assessment order, claiming it was void ab initio. The Tribunal did not address this issue directly, focusing instead on the appropriateness of the benchmarking method.

Conclusion:
The Tribunal partially allowed the assessee's appeal, directing the TPO to benchmark international transactions using the CUP method and, if necessary, the sixth method or TNMM. The Tribunal dismissed the revenue's appeal and other grounds of the assessee's appeal as infructuous. The Tribunal emphasized the need for reliable data and proper opportunity for the assessee to support its benchmarking analysis.

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