2020 (5) TMI 630 - AT - Income Tax

TP Adjustment - MAM - TNMM v/s CPM - TPO arriving ALP by using TNMM Method and rejecting the CPM Method used by the appellant company for the purpose of determining ALP - HELD THAT -Geographical difference, by itself, does not render an independent transaction uncomparable with controlled transaction. Geographical location, by itself, is not an important factor for deciding comparability of an uncontrolled transaction, its importance lies in being one of the factors which could affect the market conditions in which respective parties operate. Unless market conditions, in which uncontrolled transactions have taken place, are materially different vis- -vis conditions in which international transaction has taken place, and such a difference is on account of geographical location of the market, geographical location of the market is of no consequence in judging comparability of an uncontrolled transaction for the purpose of ascertaining the ALP. In respect of consultancy services in such highly sophisticated area as oil and gas sector, the fact that the client is in jurisdiction A and B, by itself, does not make such factor on standalone basis. This objection of the TPO that merely because clients are located at different geographical location, the prevailing market conditions will be different proceeds on the unproven assumption that that the scope of such market as consultancy services with respect to oil and gas sector in India is based on location of the client and that, therefore, it has a bearing on the profit margin. Unlike the market for a physical product, the market for consultancy services of such a nature is unlikely to be restricted to national boundaries, and, therefore, location of some of the clients at one location or the other would not really matter. In any case, the stand of the TPO was that some of the non-AEs are situated in India, and for this reason, these transactions should not have been treated as valid internal comparables is unsustainable in law, inasmuch as, all it can justify at best is exclusion of such transactions within Indian market, rather than rejecting the method, of ascertaining the ALP, itself. In our considered view, therefore, none of the reasons assigned by the TPO, for rejection of the CPM, was thus sustainable in law. TPO does indeed have powers, under section 92C(3), where he is, inter alia, of the opinion that the most appropriate method for ascertaining the arm s length price has not been used for determination of arm s length price, to proceed with his determination of arm s length price in accordance with section 92C(1) and 92C(2), and, by implication, adopt what he perceives to be the most appropriate method. However, this can only be done by following the course laid down in proviso to Section 92C(3), i.e. by issuing specific show cause notice to that effect by the TPO, and the reasons so assigned for rejection of the most appropriate method, adopted by the assessee, are subject to judicial scrutiny. For the detailed reasons set out above, we find that the reasoning adopted by the TPO was incorrect and thus unsustainable in law. Accordingly, the impugned ALP adjustment of ₹ 1,80,00,639 by rejecting the CPM method adopted by the assessee and by adopted the TNMM method, for ascertaining the arm s length price, must be deleted for this short reason alone. Pronouncement of orders within 90 days - Covid-19 epidemic - Worldwide lockdown - HELD THAT - Rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. The extraordinary steps taken suo motu by Hon ble jurisdictional High Court and Hon ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words ordinarily , in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.

Summary

Issues Involved:
1. Appropriateness of rejecting the Cost Plus Method (CPM) for determining the Arm's Length Price (ALP) and adopting the Transactional Net Margin Method (TNMM).
2. Confirmation of ALP adjustment of ?1,80,00,639 by the Dispute Resolution Panel (DRP).
3. Procedural compliance regarding the time limit for pronouncement of the order.

Detailed Analysis:

1. Appropriateness of Rejecting CPM and Adopting TNMM:
The primary issue was whether the Transfer Pricing Officer (TPO) was correct in rejecting the CPM for determining the ALP of transactions with Associated Enterprises (AEs) and adopting TNMM instead. The TPO's reasons for rejecting CPM included significant volume differences between AE and non-AE transactions, differences in functions performed, assets deployed, and risks assumed. The TPO also noted issues with unrelated party projects and geographical differences in market conditions.

The Tribunal analyzed these reasons and found them unsustainable. The volume difference was not deemed material enough to affect comparability. The TPO's claim of differences in functions, assets, and risks was not elaborated with specifics. Issues faced by unrelated party projects were not relevant to the profit element in revenues. Geographical differences alone were insufficient to reject CPM, as the market for consultancy services in the oil and gas sector is not restricted by national boundaries.

The Tribunal concluded that the TPO did not follow the proper procedure for rejecting CPM and adopting TNMM. The TPO must demonstrate that the method proposed is more appropriate, which was not done in this case. Consequently, the ALP adjustment of ?1,80,00,639 was deleted.

2. Confirmation of ALP Adjustment by DRP:
The DRP confirmed the TPO's adoption of TNMM and the resulting ALP adjustment, but provided some relief on the selection of comparable companies. However, the Tribunal found that the DRP's confirmation of the TPO's rejection of CPM was incorrect. The Tribunal's decision to delete the ALP adjustment rendered other issues raised in the appeal infructuous.

3. Procedural Compliance Regarding Time Limit for Pronouncement:
The order was pronounced beyond the 90-day period from the conclusion of the hearing due to the nationwide lockdown imposed to prevent the spread of COVID-19. The Tribunal referred to Rule 34(5) of the Income Tax Appellate Tribunal Rules, 1963, which allows for pronouncement beyond 90 days in exceptional circumstances. The Tribunal justified the delay by citing the unprecedented disruption caused by the lockdown and the extensions provided by higher judicial authorities, including the Supreme Court and the Bombay High Court.

The Tribunal emphasized that the interpretation of time limits should consider ground realities and the extraordinary situation caused by the pandemic. Therefore, the delay in pronouncement was deemed justified, and the appeal was allowed.

Conclusion:
The Tribunal allowed the appeal, deleting the ALP adjustment of ?1,80,00,639 by rejecting the TPO's adoption of TNMM over CPM. The procedural delay in pronouncement due to the COVID-19 lockdown was also justified.