2020 (9) TMI 1054 - HC - Income Tax

TP Adjustment - MAM selection - As per DRP and the Tribunal CUP method was appropriately used in preference to TNMM - Whether the Tribunal was right in holding that transactional net margin method should not be applied for benchmarking/ computing arms length price in respect of 0.88% of a transaction when 99.12% of the international transaction forming part of same class have been subject to transactional net margin method under Rule 10B(1)(e) read with Rule 10C? - HELD THAT - Tribunal should not have remanded the matter back to the authorities below and that too to the two different authorities, viz., Dispute Resolution Panel and Commissioner of Income Tax (Appeals), in previous order, and that too by committing a mistake of misreading of the previous order dated 21.12.2012 and holding that CUP Method was already decided to be the only appropriate method, whereas the Assessee has been contending otherwise throughout, and is aggrieved by the adoption of the CUP method and was pressing of TNM Method. In the facts and circumstances of the case, and Assessee is again in the second round of appeals before the learned Tribunal against the orders passed by the authorities below on the remand made by the previous order dated 21.12.2012. As expected Tribunal also to realize the consequences of an open remand made or a remand made to the authorities below only for re-computation with the appropriateness of the method decided finally at its own end. The multiplicity of the litigation and rounds of appeal, what we have described as a shuttle game, should have been seen by the learned Tribunal and therefore, we expect at least from now on, the learned Tribunal will decide on the issue of the appropriateness of the method for TP adjustments, while deciding all the pending appeals before it, as far as this Assessee is concerned and also other Assessees by recording its own reasons and taking into account the relevant evidence and materials on record, and if necessary, by calling additional evidence before it, with regard to the external comparables, from both the sides. We do not expect a further open remand by the learned Tribunal on the said issue any more because such decision of the learned Tribunal is likely to affect not only the years under consideration before the learned Tribunal but also the future assessment years, as the Assessee continues to remain in the same business for such future years also. Commission paid to M/s.The Central Agency as 'Business Expenditure' - HELD THAT - we leave it free for the Tribunal to look into the past history of the Assessee about the allowability of the said expenditure, and as such expenditure for the previous years has been consistently allowed by the Revenue Authority below, and there was no contrary finding by the learned Tribunal for the previous years. Tribunal may re-decide the said issue also fairly and objectively in the light of the materials available before it for the present AY 2009-10 also.

Summary

Issues Involved:

1. Appropriateness of the CUP method vs. TNMM for Transfer Pricing Adjustment.
2. Jurisdiction of the TPO in determining the necessity of business expenditures.
3. Allowability of commission expenditure paid to The Central Agency as business expenditure.

Issue-wise Detailed Analysis:

1. Appropriateness of the CUP Method vs. TNMM for Transfer Pricing Adjustment:

The Assessee challenged the Tribunal's decision that the CUP (Comparable Uncontrolled Price) method was more appropriate than the TNMM (Transactional Net Margin Method) for Transfer Pricing Adjustment (TP Adjustment) for AY 2009-10. The Tribunal had previously remanded the matter to the TPO for recalculating TP adjustments using the CUP method, based on its decision for earlier years. However, the Tribunal's interpretation of its earlier order was contested. The High Court clarified that the previous order was an open remand, allowing the TPO to decide the most appropriate method. The High Court emphasized that the selection of the method should be based on the specific facts and circumstances of each case and is not a question of law for the High Court to decide. The Tribunal was directed to finalize the method for TP adjustments without further remands, considering all relevant evidence, including external comparables.

2. Jurisdiction of the TPO in Determining the Necessity of Business Expenditures:

The Assessee questioned the TPO's jurisdiction to assess the commercial expediency of business expenditures. The Tribunal had held that the TPO could not question how the Assessee should conduct its business or the necessity of incurring certain expenditures. The High Court agreed with this view, citing the Delhi High Court's judgment in the case of M/s. EKL Appliances Ltd., which emphasized that the necessity of business expenditures should be understood from the perspective of a prudent businessman. The High Court reiterated that the onus was on the Assessee to demonstrate the business purpose of the payments made.

3. Allowability of Commission Expenditure Paid to The Central Agency:

The Assessee contended that the commission paid to The Central Agency for procuring purchase orders should be allowed as a business expenditure. The Tribunal had disallowed this expenditure, stating that there was no evidence of actual services rendered by The Central Agency. The High Court noted that for previous years, such expenditure had been allowed based on similar evidence. The High Court directed the Tribunal to reconsider this issue, taking into account the Assessee's past history and the materials available on record. The Tribunal was instructed to decide the matter objectively and fairly, considering the evidence of services rendered by The Central Agency.

Conclusion:

The High Court set aside the Tribunal's order dated 16 November 2016, remanding both issues back to the Tribunal for a fresh decision. The Tribunal was directed to finalize the method for TP adjustments and reconsider the allowability of the commission expenditure, based on a thorough examination of the evidence and materials on record. The Tribunal was requested to expedite the decision within six months, given the prolonged duration of the case. The appeal was disposed of without any order as to costs.