2017 (11) TMI 585 - HC - Income Tax

Application of Berry Ratio and Transactional Net Margin Method (TNMM) method - MAM - adjustment made in the present case unsupported by proper application of Rules 10B or 10C of the Income Tax Rules, 1962 - Held that - The assessee has used Berry Ratio while applying TNMM to benchmark the international transactions. Once, CUP has been accepted as the most appropriate method there is no question of applying any other method to corroborate the analysis made under CUP. The assessee has to explain the benchmarking of international transactions by applying the most appropriate method selected to benchmark the transaction. This Court is of the opinion that the Tribunal s findings cannot be faulted. The interest offering which the assessee emphasises is nothing but an income attributable to the transaction which it had sought to utilize. In the circumstances, the authorities decision, therefore, cannot be characterized as erroneous. The provisions of the acts and rules apply in making the adjustments in the present case; the same would apply even in the case of discount for the sale transaction which was undertaken after six months.

Issues:
1. Application of Berry Ratio and Transactional Net Margin Method (TNMM) method.
2. Arm's Length Price (ALP) adjustment for international transactions.
3. Acceptability of advance consideration and discount offered to Associated Enterprise (AE).
4. Dispute Resolution Panel (DRP) decision.
5. Application of Comparable Uncontrolled Prices Method (CUP) and TNMM.
6. Allowability of cash discounts in business transactions.

1. Application of Berry Ratio and TNMM:
The appellant challenged the Tribunal's decision regarding the application of Berry Ratio and TNMM method in international transactions. The Tribunal emphasized the use of CUP as the most appropriate method and rejected the appellant's contentions related to Berry Ratio. The Tribunal held that once CUP is accepted, there is no need to apply other methods. The appellant's arguments regarding advance consideration and cash discounts were also dismissed by the Tribunal, emphasizing the need to explain transactions using the selected most appropriate method, i.e., CUP. The High Court concurred with the Tribunal's findings, stating that the authorities' decision was not erroneous, and the adjustments were made in accordance with the applicable rules.

2. ALP Adjustment for International Transactions:
The appellant, a manufacturer and trader of edible oil and plastic films, declared a net loss for a specific assessment year. The Assessing Officer found discrepancies in international transactions with the Associated Enterprise (AE), leading to an ALP adjustment for principal payment and sale transactions. Despite the appellant's arguments regarding the commercial prudence of advance consideration and trade discounts, the Tribunal upheld the adjustments, stating that discounts must be explained with rationality. The High Court affirmed the Tribunal's decision, emphasizing that the adjustments were made within the framework of the Income Tax Act and rules.

3. Acceptability of Advance Consideration and Discounts:
The appellant's plea regarding the advance consideration received and discounts offered to the AE was rejected by the Tribunal. The Tribunal deemed the advance consideration and discounts as part of normal business practices but required rational explanations for such transactions. The appellant's contentions related to saving interest through advance consideration and trade discounts were not accepted. The High Court agreed with the Tribunal's assessment, stating that the transactions must be explained within the context of the most appropriate method, i.e., CUP.

4. DRP Decision:
The appellant approached the Dispute Resolution Panel (DRP) after the Assessing Officer's findings, but the plea was unsuccessful. Subsequently, the appellant appealed to the Tribunal, challenging the adjustments made in international transactions. The Tribunal's decision to uphold the adjustments was based on the application of the most appropriate method, CUP, and rational explanations for discounts offered in business transactions.

5. Application of CUP and TNMM:
Initially, the appellant applied the Comparable Uncontrolled Prices Method (CUP) for international transactions but later switched to TNMM during the proceedings. The Tribunal rejected this change, citing Rule 10 of the Income Tax Rules, which grants discretion to the authorities to apply the most appropriate method. The High Court supported the Tribunal's stance, emphasizing the necessity of explaining transactions using the selected method, i.e., CUP, in the present case.

6. Allowability of Cash Discounts:
The Tribunal accepted the allowability of cash discounts in business transactions, distinguishing them from trade discounts. It highlighted the normal practice of offering discounts for early payments or advance receipts. The Tribunal required rational explanations for discounts offered, which the appellant failed to provide adequately. The High Court concurred with the Tribunal's view, stating that discounts must be explained within the context of the chosen method, i.e., CUP.

← Previous Next →