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2017 (7) TMI 918 - HC - Income TaxTPA - selection of MAM - Held that - It is apparent from a plain reading of order of the CIT (A) that it agreed with the Assessee that the transactions both in Class I and II segments had to be benchmarked by applying the TNMM. Therefore it was factually erroneous on the part of the ITAT to observe to the contrary. Likewise the ITAT proceeded on an erroneous assumption of fact that the RPM method was approved by CIT(A) for benchmarking the class II segment transactions. Change in the functional profile of the business of the Assessee - The functional profile of the Assessee for the AY in question i.e. AY 2004-05 has not changed in the subsequent AYs i.e. 2007-08 to 2010-11. The TPO has in each of the subsequent AYs i.e. 2007-08 to 2010-11 accepted the TP Study .of the Assessee insofar as the determination of ALP for the Class T Class II segment international transactions are concerned. Consequently the Court is unable to accept the plea of the Revenue in the present case that the Court should proceed on the assumption that the Assessee had changed his business profile and functions. If there is in fact no change in the business profile of the Assessee in all these years i.e. in AY 2004-05 as well as subsequent years there is no warrant for the Court to uphold the order of the ITAT remitting the matter to the TPO/AO or for this Court to remand the appeal to the ITAT for a fresh consideration. That will be a sheer waste of time and would serve no purpose.
Issues:
1. Interpretation of the benchmarking methods for international transactions under different segments. 2. Validity of the orders passed by the TPO and CIT(A) regarding the benchmarking methods. 3. Applicability of the rule of consistency in transfer pricing assessments for different assessment years. 4. Transfer of advertising, marketing, and promotion functions to the Associated Enterprise. Issue 1: Interpretation of Benchmarking Methods: The appeal involved questions concerning the benchmarking methods for international transactions under different segments. The Appellant adopted the Transactional Net Margin Method (TNMM) for benchmarking transactions in the Manufacturing and Trading/Distribution segments. However, the Transfer Pricing Officer (TPO) recommended the Comparable Uncontrolled Price (CUP) method for the Manufacturing segment and the Re-sale Price Method (RPM) for the Trading segment. The CIT(A) disagreed with the TPO and upheld the TNMM as the Most Appropriate Method (MAM) for both segments. Issue 2: Validity of TPO and CIT(A) Orders: The ITAT set aside the CIT(A) order and remanded the matter to the TPO/AO for determining the Arm's Length Price (ALP) using the CUP method for the Manufacturing segment and the RPM method for the Trading segment. The ITAT made factual errors in interpreting the CIT(A) order, leading to a misunderstanding of the approved benchmarking methods. The High Court observed that the CIT(A) had indeed upheld the TNMM method for both segments, contrary to the ITAT's understanding. The High Court found the ITAT's interpretation to be factually erroneous. Issue 3: Rule of Consistency in Transfer Pricing Assessments: The Revenue argued for the rule of consistency in transfer pricing assessments, suggesting that changes in the functional profile of the Assessee's business in subsequent years should be considered. However, the High Court noted that the functional profile of the Assessee remained consistent across different assessment years, as evidenced by the TPO's acceptance of the Assessee's TP Study for subsequent years. The High Court rejected the Revenue's plea to assume a change in the business profile and functions, emphasizing the lack of factual basis for such an assumption. Issue 4: Transfer of AMP Functions to AE: The issue of transfer by the Assessee of its advertising, marketing, and promotion (AMP) functions to its Associated Enterprise was raised by the Revenue but was not the subject matter of the present appeal. The High Court noted that this issue was pending at various levels in subsequent years, indicating that it was not relevant to the current appeal. In conclusion, the High Court answered questions (i) and (ii) in favor of the Assessee, setting aside the ITAT's order and affirming the CIT(A)'s order. The appeal was allowed, and the application was disposed of with no orders as to costs.
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