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2016 (12) TMI 942 - AT - Income TaxTPA - whether the Comparable Uncontrolled Price (CUP) method is the most appropriate method as compared to Transactional Net Margin Method (TNMM) - Held that - The assessee bears lesser business risk than independent comparable enterprises due to the nature of its revenue model. It is beyond any doubt that the project receipts are from KMRCL which is a Government body and hence the margins earned by the assessee is bound to be comparatively lower to reflect the lower level of business risk involved. Moreover, the comparables selected for the analysis also include companies that performs additional functions while being engaged in providing comparable services. Further the risk profiles of independent companies differ from that of assessee. The impact of these functional and risk differences definitely require to be factored while determining the ALP. We find that in the interest of justice and fair play, we deem it fit and appropriate to set aside this issue to the file of the Learned TPO / AO with a direction to adopt CUP method as the Most Appropriate Method for determination of ALP for international transactions. The assessee is also directed to furnish the comparables based on independent TP study for adoption of CUP method and produce such other evidences and documents before the Learned TPO / AO to ensure quick disposal of this set aside proceedings. We also direct the Learned TPO / AO to permit the assessee to use multiple year data and adopt the weighted average data of the financial information of the comparables and use the same for determination of ALP of the international transactions of the assessee.
Issues Involved:
1. Determination of the most appropriate method for computing the Arm’s Length Price (ALP) between Comparable Uncontrolled Price (CUP) method and Transactional Net Margin Method (TNMM). 2. Admissibility of additional grounds of appeal regarding the adoption of CUP method. 3. Appropriateness of TNMM in the absence of profit element in international transactions. 4. Comparison of the assessee's first-year operations with established companies. 5. Transfer Pricing Officer's (TPO) rejection of comparables and substitution with new ones. 6. Whether the assessee can shift from TNMM to CUP method at the appellate stage. Detailed Analysis: 1. Determination of the Most Appropriate Method: The central issue in this appeal was whether the CUP method or TNMM was the most appropriate method for determining the ALP of the international transactions undertaken by the assessee. The assessee initially adopted the CUP method in its Form 3CEB filed along with the return of income but later shifted to TNMM during the assessment proceedings. The TPO, however, determined the ALP using TNMM, leading to an upward adjustment. 2. Admissibility of Additional Grounds of Appeal: The assessee filed additional grounds of appeal seeking to revert to the CUP method. The tribunal admitted these grounds, emphasizing that they involved a legal issue that went to the root of the matter. The tribunal cited the Supreme Court decision in NTPC Ltd vs CIT, which allows for the admission of new grounds if they are already part of the record and essential for deciding the issue. 3. Appropriateness of TNMM in the Absence of Profit Element: The tribunal agreed with the assessee's argument that TNMM might not be appropriate when there is no profit element in the international transactions, such as reimbursement of expenses on a cost-to-cost basis. The tribunal noted that TNMM compares the profits of various comparables, which is not suitable when the transactions do not involve a profit element. 4. Comparison with Established Companies: The tribunal acknowledged that the comparables chosen by the TPO were established companies with an average existence of 22 years, while the assessee was in its first year of operation. This disparity in experience and operational duration was significant, as the assessee had to incur substantial initial expenses, with revenue expected to flow in later years. The tribunal referenced the Pune Tribunal's decision in Skoda Auto India P Ltd vs ACIT, which highlighted the need for adjustments when comparing start-up operations with established companies. 5. TPO's Rejection of Comparables: The TPO rejected two of the eleven comparables chosen by the assessee and substituted them with new ones, resulting in an upward adjustment of the ALP. The tribunal found that the TPO's approach was flawed, as the comparables were not functionally similar to the assessee's operations. 6. Shifting from TNMM to CUP Method at the Appellate Stage: The tribunal held that the assessee could shift from TNMM to CUP method at the appellate stage if it demonstrated that CUP was more appropriate for determining the ALP. The tribunal referenced the Mumbai Tribunal's decision in Mattel Toys (I) (P) Ltd vs DCIT, which allowed for a change in the method if it resulted in a more accurate determination of the ALP. Conclusion: The tribunal concluded that the CUP method was the most appropriate method for determining the ALP of the international transactions, given the absence of a profit element in the reimbursements. The tribunal set aside the issue to the file of the TPO/AO with directions to adopt the CUP method and permit the use of multiple-year data for comparables. The appeal was allowed for statistical purposes. Order Pronounced: The order was pronounced in the court on 29.09.2015.
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