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2019 (1) TMI 1351 - AT - Income TaxTPA - ALP determination - rejecting transactional net margin method (TNMM) adopted by the assessee as the most appropriate method (MAM) - Held that - TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the TPO has mentioned that arms length price has determined by applying CUP method but in fact the TPO has not come up with any comparables to justify the application of cup method. TPO has not brought on record any material to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. The Ld. TPO has also not brought on record any instance where comparable services were provided to an independent enterprise in the recipient market. So in view of the fact that the TPO has, in fact, not applied the CUP method to determine the arm s length price of the transaction, there is no reason to reject the TNMM method applied by the assessee. Law does not permit the TPO to determine the arm s length price on estimation basis. We are therefore, of the considered view that the arms length determined by the Ld. TPO is not in accordance with the provisions of the Act and the ratio of law laid down by the Hon ble jurisdictional High Court. On the other hand the intra group services are closely linked to the business of the assessee and the assessee s benchmarking approach is based on TNMM. Whether the legal infirmity in the impugned order can be cured by restoring the issue to the Ld. TPO? - Held that - We hold that since the TPO has not made the transfer pricing adjustment by following the mandatory provisions of the law and determined the same on estimation basis, action of the Ld. DRP in upholding the TP adjustment so made by the TPO is bad in law. So far as the cases relied upon by the Ld. DR is concerned, we are of the considered view that the facts of the said cases are different from the facts of the present case. Since, the Ld. TPO has not determined the arm s length price in accordance with the provisions of law, there is no reason to hold that the TNMM method applied by the assessee is not the most appropriate method within the meaning of section 92C of the Act. - Assessee appeal allowed.
Issues Involved:
1. Rejection of Transfer Pricing (TP) analysis by the assessee. 2. Adjustment to the Arm's Length Price (ALP) determined by the assessee. 3. Appropriateness of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). 4. Application of prescribed methods under section 92C(1) of the Income Tax Act. 5. Consideration of documentary evidence and commercial expediency by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP). Issue-Wise Detailed Analysis: 1. Rejection of Transfer Pricing (TP) Analysis by the Assessee: The assessee, a subsidiary of Credit Lyonnais Securities Asia (CLSA) incorporated in the Netherlands, filed its return of income declaring a total income of ?1,29,91,09,122/-. The TPO determined the arm's length price (ALP) of the international transactions entered into by the assessee with its associated enterprises (AEs) and made an upward adjustment of ?143,67,42,784/-. The assessee challenged this adjustment, arguing that the TPO wrongly rejected the TNMM as the most appropriate method (MAM) for determining the ALP. 2. Adjustment to the Arm's Length Price (ALP) Determined by the Assessee: The TPO made an upward adjustment to the ALP, which was upheld by the DRP. The assessee contended that the TPO did not appropriately apply any of the prescribed methods under section 92C(1) of the Act and failed to appreciate the voluminous documentary evidence provided. The assessee argued that the TPO's determination of the ALP was not based on any comparable uncontrolled transaction and was done without considering the benefits derived by the assessee. 3. Appropriateness of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM): The assessee used the TNMM, considering itself as the tested party, to benchmark the international transactions. The TPO rejected this method, arguing that the intra-group services received by the assessee were a separate class of transactions and could not be aggregated with other international transactions. The TPO estimated the man-hours of services rendered by the AE and applied a rate of ?3000 per hour to determine the ALP. The Tribunal found that the TPO's adjustment was made on an estimation basis without any supporting material and that the TPO did not bring any comparable uncontrolled transactions on record. 4. Application of Prescribed Methods Under Section 92C(1) of the Income Tax Act: The Tribunal held that the TPO is mandated by law to determine the ALP by following one of the prescribed methods under section 92C(1) of the Act. The TPO's determination of the ALP on an estimation basis was found to be not in accordance with the provisions of the Act. The Tribunal cited various judgments, including the Hon'ble jurisdictional High Court's ruling in the case of Johnson & Johnson Ltd., which held that the TPO must determine the ALP by following one of the prescribed methods and that ad-hoc determination is not permissible. 5. Consideration of Documentary Evidence and Commercial Expediency by the TPO and DRP: The Tribunal observed that the assessee had submitted extensive documentary evidence, including a transfer pricing study report, copies of service level agreements, and a supplementary analysis from Price Waterhouse Coopers (PWC) and KPMG. The Tribunal found that the assessee had complied with all requirements under the Act and the Rules and had demonstrated that the transaction was at arm's length. The Tribunal concluded that the TPO's rejection of the TNMM and the DRP's upholding of the TPO's adjustment were not justified. Conclusion: The Tribunal allowed the appeal filed by the assessee and directed the AO to delete the upward adjustment of ?143,67,42,784/- confirmed by the DRP. The Tribunal held that the TPO's determination of the ALP on an estimation basis was not sustainable in law and that the TNMM applied by the assessee was the most appropriate method for benchmarking the international transactions. The Tribunal emphasized that the TPO must follow one of the prescribed methods under section 92C(1) of the Act and that ad-hoc determination of the ALP is not permissible.
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