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2017 (2) TMI 901 - AT - Income TaxTransfer pricing adjustment - as per assessee TNMM rejected without proper reasoning and a method which was unknown to the law was used by the ld. TPO for the transfer pricing analysis - Held that - In the case of Frigoglass India (P) Ltd (2016 (8) TMI 1081 - ITAT DELHI)as held CUP method could be adopted after discarding TNMM only when a comparable product or service is available. Ld. TPO and ld. DRP were not able to identify a single uncontrolled comparable for bench marking R & D fees and management fees paid by the assessee. This may be due to the difficulties in finding another entity that had rendered services which were identical to what were given to the assessee by M/s.Durr Systems Gmbh, Germany, that too in an uncontrolled set of circumstance. In such a situation in our opinion assessee could not be faulted in insisting that the TNMM method adopted by it for analyzing its international transactions with Associated Enterprises, for the impugned assessment years should be accepted. Nevertheless, we find that lower authorities having rejected the TNMM method did not verify the appropriateness of the comparables selected by the assessee in its TP study. Functional profile of the comparables and that of the assessee were never verified. Lower authorities did not verify whether the Arms Length Price analysis done by the assessee based on TNMM was correctly done and whether any modification in the comparables selected or the PLI computed were necessary. Thus, while setting aside the orders of the lower authorities for all the impugned assessment years, we remit the issue of fixing the Arms Length Price of the international transactions of the assessee under TNMM, back to the file of the ld. Assessing Officer /ld. TPO for consideration afresh in accordance with law. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Rejection of Transactional Net Margin Method (TNMM) by the TPO. 2. Adoption of Comparable Uncontrolled Price (CUP) method by the TPO. 3. Allocation of Research & Development (R&D) and Management Fees. 4. Adjustment of Arms Length Price (ALP) for international transactions. 5. Acceptance of TNMM in previous assessment years. Detailed Analysis: 1. Rejection of Transactional Net Margin Method (TNMM) by the TPO: The assessee adopted TNMM for analyzing the pricing of international transactions, aggregating all classes of transactions together. The TPO, however, rejected TNMM, asserting that each class of transactions with Associated Enterprises needed separate benchmarking. The TPO argued that ALP should be determined on a transaction-to-transaction basis, considering functions performed, assets employed, and risks assumed. The TPO did not provide detailed reasoning for rejecting TNMM, which had been accepted in the previous assessment year 2008-09 on similar facts. 2. Adoption of Comparable Uncontrolled Price (CUP) method by the TPO: The TPO adopted the CUP method as the most suitable one, focusing on engineering services and management fees segments. The TPO did not identify any comparable uncontrolled transactions to justify the CUP method. The DRP confirmed the rejection of TNMM but also found the TPO's method of fixing R&D and management fees based on turnover increase incorrect. The DRP suggested that allocation should be based on the ratio of sales of various Associated Enterprises, essentially using a method akin to CUP without identifying comparables. 3. Allocation of Research & Development (R&D) and Management Fees: The assessee argued that R&D and management fees were allocated fairly by Durr Systems Gmbh, Germany, based on a PAS cost allocation agreement. The allocation was done using a formula considering total external sales and operating profits for R&D, and headcounts for management fees. The TPO, however, found the allocation method skewed, suggesting it was designed to even out costs among Associated Enterprises, leading to an upward adjustment for overcharging R&D and management fees. The DRP disagreed with the TPO's normalization method but upheld the rejection of the assessee's allocation formula. 4. Adjustment of Arms Length Price (ALP) for international transactions: The TPO recommended adjustments for the engineering services and management fees segments, leading to substantial adjustments in the ALP for the assessment years 2009-2010, 2010-2011, and 2011-2012. The DRP confirmed these adjustments, leading to completed assessments with downward adjustments in R&D expenses. 5. Acceptance of TNMM in previous assessment years: The assessee contended that TNMM was accepted in the previous assessment year 2008-09 on similar facts and should be consistently applied. The assessee argued that the TPO's method was not recognized under Rule 10AB or Rule 10B of the Income Tax Rules, and adjustments made were ad hoc. The Tribunal noted that the TPO did not verify the appropriateness of comparables selected by the assessee for TNMM and did not discuss the comparables considered by the assessee. Conclusion: The Tribunal found that the TPO and DRP did not identify any comparable uncontrolled transactions for benchmarking R&D and management fees. The Tribunal emphasized that without identifying comparables, the CUP method could not be preferred over TNMM. The Tribunal set aside the orders of the lower authorities and remitted the issue of fixing the ALP of international transactions under TNMM back to the Assessing Officer/TPO for fresh consideration in accordance with law. The appeals of the assessee for all three assessment years were allowed for statistical purposes.
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