2019 (2) TMI 1449 - HC - Income Tax

TP adjustment - TPO to use Transactional Net Margin Method (TNM Method) to determine the Arms Length Price (ALP) of the respondent s International Transactions on the ground that it is the most appropriate method as it is consistently accepted/adopted by the Revenue - HELD THAT - We note that the Revenue has been accepting the TNM method as most proper method for benchmarking the aggregated international transactions with AE s over the period of time. The same has been accepted by the Revenue on examination of the issue. It is found that the TPO had for the other years on same facts has accepted the fact that there was no difference in two segments involved for transfer pricing. Thus, consistently accepting the TNM method as the most appropriate method to determine the ALP of the respondent s aggregated International Transaction till Assessment Year 2015-16. The Revenue has not been able to show any material difference in the subject assessment year which would justify a change in the most appropriate method (TNM method) adopted while benchmarking the international transactions. So far as the order dated 1st August, 2018 of this Court in case of John Deere India (P) Ltd. 2015 (3) TMI 318 - ITAT PUNE admitting the appeal of the Revenue is correct, we find that it has not been admitted on the question which arises in the present petition, i.e. the effect of the Revenue consistently accepting TNM Method as the most appropriate method for benchmarking international transactions with AE s in the absence of any material change of the facts or law. No application to the present facts. The objection to rejection of comparables taken by the Revenue before us, does not address the issue of the most appropriate method for benchmarking its international transaction. We are also unable to understand the contention on behalf of the Revenue that it is for the respondent to prove that there is no change/ difference in facts in the subject Assessment Year from the subsequent Assessment Years. Where TNM method is accepted to determine the ALP of international transaction. Infact, no change in facts has been asserted by the respondent. Therefore, it would be for the Revenue to show the difference in facts warranting a different view in this Assessment Year to that taken in the subsequent Assessment Years. We have herein above extracted paragraph 18 of the impugned order of the Tribunal and on its reading we are of the view that the same is a finding of fact based on appreciation of evidence. No substantial question of law.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2005-06 - Whether Transfer Pricing Officer (TPO) was right in directing the use of Transactional Net Margin Method (TNM Method) to determine Arms Length Price (ALP) of respondent's International Transactions instead of Resale Price Method (RPM) and Cost Plus Method (CPM).

Analysis:

1. Issue of Appropriate Transfer Pricing Methodology:
The appeal challenged the order of the Income Tax Appellate Tribunal directing the use of TNM Method for determining the ALP of the respondent's International Transactions. The respondent, engaged in manufacturing resistors and capacitors, had adopted TNM Method in its Transfer Pricing study, aggregating all international transactions with AE's. The TPO, however, applied RPM for import transactions and CPM for export transactions, resulting in a significant adjustment. The Tribunal noted the consistent application of TNM Method by the Revenue in prior years and held that TNM Method was most appropriate for benchmarking the transactions with AE's. The Tribunal emphasized the need for consistency in methodology unless material differences were demonstrated. The Court found no justification for deviating from TNM Method and dismissed the appeal, emphasizing the Revenue's consistent acceptance of TNM Method.

2. Consistency in Transfer Pricing Approach:
The Court highlighted the Revenue's historical acceptance of TNM Method as the most suitable for benchmarking aggregated international transactions with AE's. It noted that the TPO had accepted TNM Method for prior years based on similar facts and segments involved in transfer pricing. The Court emphasized that the Revenue failed to demonstrate any material differences in the subject assessment year that would warrant a departure from TNM Method. The Court rejected the Revenue's argument that the burden was on the respondent to prove consistency, stating that it was the Revenue's responsibility to show factual variances necessitating a change in methodology. The Court found the Tribunal's decision based on factual assessment and evidence, warranting no interference.

3. Legal Standing and Lack of Substantial Question of Law:
The Court concluded that the proposed question did not raise any substantial question of law, leading to the dismissal of the appeal. The Court clarified that the admission of a Revenue's appeal in a different case did not impact the present matter, as the issue of consistent application of TNM Method was not under consideration in the admitted appeal. The Court upheld the Tribunal's findings, emphasizing the factual basis of the decision and the absence of grounds for interference. Consequently, the appeal was dismissed without costs.

In summary, the judgment upheld the consistent application of TNM Method by the Revenue for benchmarking international transactions with AE's, emphasizing the importance of factual consistency and lack of material differences to justify a change in transfer pricing methodology. The Court's decision was based on the factual assessment by the Tribunal, leading to the dismissal of the appeal due to the absence of substantial legal questions.