2018 (3) TMI 536 - HC - Income Tax

Determine the ALP of the export sales to AEs - considering TNMM and MAM - manufacturing of electric connectors, accessories, cable assemblies and system integration - Held that - We find that the TPO has while stating that FAR analysis has to be carried out, does not indicate that it was carried out. Tribunal in the impugned order has done the necessary FAR analysis. As compared the risk and functional differences involved in finished goods being sold to AEs as against those sold to third parties as we have enumerated above to come to the conclusion that the prices at which the finished goods sold to the third parties are not comparables to the prices at which the goods sold to the AEs on the FAR analysis. Finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, came to a conclusion that the CUP method would not be the MAM to determine the ALP. It upheld the stand of the respondent assessee that TNM method is the MAM to arrive at ALP. Thus, the view taken by the Tribunal on the facts before it, is a possible view on the application of appropriate tests. Revenue has not shown that the selection of TNM method as the MAM to determine the AL of export to AEs is perverse. Differentiating CUP analysis on the basis of geographic difference and volume difference in respect of sale commission - Held that - We note that the impugned order of the Tribunal has analyzed the differences between sales commission paid to its AEs for clients identified by them and the sales commission paid to third party agents in respect of sales goods in India. On account of the differences in respect of function and geography between the AEs transaction and third party transaction, the CUP method is not the MAM method. Therefore, held that TNM method is the most appropriate. View of the Tribunal that the TNM method is the most appropriate method is a reasonable and possible view on application of appropriate test in the present facts.

Summary

Issues:
1. Challenge to the impugned order of the Income Tax Appellate Tribunal for Assessment Years 2006-07, 2007-08, and 2008-09 under Section 260A of the Income Tax Act, 1961.
2. Determination of the Most Appropriate Method (MAM) for determining the Arm's Length Price (ALP) in transactions with Associated Enterprises (AEs).
3. Justification of TNMM and MAM over FAR analysis and CUP analysis in determining ALP.
4. Differentiation of CUP analysis based on geographic and volume differences in sales commission.
5. Analysis of functions, assets, and risk (FAR) in determining the appropriate transfer pricing method.

Analysis:

Issue 1: Challenge to the Impugned Order
The appeals challenge the common impugned order of the Income Tax Appellate Tribunal for the mentioned assessment years. The Tribunal allowed the respondent assessee's appeal from the Assessing Officer's orders under Section 143(3) r/w 144C of the Act, based on the directions of the Dispute Resolution Panel.

Issue 2: Determination of Most Appropriate Method (MAM)
The Tribunal upheld the Transactional Net Margin Method (TNMM) as the MAM for determining the ALP in transactions with AEs, rejecting the Comparable Uncontrolled Price (CUP) method proposed by the Assessing Officer / Transfer Pricing Officer (TPO). The Tribunal based its decision on the specialization and customization of the finished goods, differences in sales to AEs and third parties, and the absence of marketing functions for sales to AEs.

Issue 3: TNMM and MAM vs. FAR and CUP Analysis
The Tribunal justified the use of TNMM over FAR and CUP analysis for determining ALP. It found that the FAR analysis was adequately conducted, comparing risk and functional differences between sales to AEs and third parties to conclude that the CUP method was not appropriate due to various adjustments needed. The Tribunal's decision on TNMM as MAM was deemed reasonable and not perverse.

Issue 4: Differentiation in CUP Analysis for Sales Commission
Regarding the differentiation in CUP analysis for sales commission, the Tribunal found significant differences in functions and commission rates between sales to AEs and third parties. Due to these variations, including geographical and functional disparities, the TNM method was deemed more suitable than the CUP method for determining the ALP of sales commission paid to AEs.

Issue 5: Analysis of Functions, Assets, and Risk (FAR)
The Tribunal's analysis of FAR in determining the appropriate transfer pricing method was found to be thorough and sufficient. It compared the risks and functional disparities in sales to AEs and third parties, concluding that TNMM was the appropriate method for arriving at the ALP in the given circumstances.

In conclusion, all three appeals were dismissed, and no costs were awarded. The Tribunal's decisions on the selection of TNMM as MAM for determining ALP in transactions with AEs were upheld as reasonable and based on a thorough analysis of the facts and legal provisions.