2020 (11) TMI 476 - AT - Income Tax

TP Adjustment - MAM selection - CIT(A) in determining the arm s length price of the international transactions based on aggregate benchmarking approach under TNMM instead of transaction-by-transaction approach - HELD THAT - On careful consideration of all the facts of this case, the arguments of both the sides and the material available on record, we hold that the Transactional Net Margin Method in relation to the impugned international transactions at the entity level, is accepted and this ground of the revenue is dismissed. MAM selection - CUP OR TNMM - CIT(A) rejecting the Comparable Uncontrolled Price (CUP) Method for benchmarking the transaction of purchase of raw materials/components and adopting TNMM on an entity level for determining arm s length price of the said transaction - HELD THAT - As relying on ATLAS COPCO (INDIA) LIMITED 2019 (8) TMI 448 - ITAT PUNE and NLC NALCO INDIA LTD. 2016 (3) TMI 639 - ITAT KOLKATA TPO has erroneously applied the CUP Method in the instant case without considering two important factors of comparability such as geographical location and volume of purchase. TPO, in similar circumstances for the AY 2003-04 and AY 2004-05 and AY 2006-07, has accepted that the international transaction involving purchase of raw materials by the assessee from associated enterprises is at arm s length under the TNMM and he has not directed ALP adjustment in respect of this international transaction by applying the CUP Method on transaction-by-transaction basis. Hence, we uphold the order of the ld. CIT(A) on this issue and dismiss Ground No. II of the revenue. Computing the figure for value addition for royalty computation - CIT-A considering only the cost of standard materials without appreciating the fact that cost of non-standard materials should also be considered for the purpose of analysis as raw material means both standard and non-standard materials - HELD THAT - In the order issued under section 92CA (3) TPO has not disputed the computation of operating revenue and operating cost made by the assessee of its transfer pricing study report as aforesaid. As the operating cost includes royalty expenses in the instant case, we, in the light of the aforesaid decision of M/S. KAYPEE ELECTRONICS ASSOCIATES 2018 (6) TMI 36 - KARNATAKA HIGH COURT decide that there is no need to benchmark royalty separately in the instant case. TPO, for the immediately succeeding assessment years (AY 2006-07 and 2007-08) has accepted that the international transaction involving payment of royalty by the assessee to EPCOS AG under the TALA is at arm s length on the same facts - Dismiss Ground No. 3 of the revenue Sales revenue generated by associated enterprise in the Indian market - action of the CIT(A) in stating that the financial indicator for the indenting activity segment of the assessee has nothing to do with the sales revenue generated by associated enterprise in the Indian market without appreciating that the indenting activity is performed for promoting sales of AE in the Indian market - HELD THAT - TPO has erroneously considered the sales made by associated enterprise directly in India (INR 50,64,18,000/-) through the marketing service rendered by assessee to the associated enterprise, as sales of the assessee and based on this consideration, he has taken the aforesaid sales figure as the denominator of the financial indicator of the assessee under the indenting segment (0.492% i.e. INR 2494835 / INR 50,64,18,000). That the TPO has failed to appreciate that the aforesaid sales figure does not pass through the books of account of the assessee and it is solely the commission income (INR 2,95,50,194/-) that passes through the books of account of the assessee as revenue under the indenting segment. CIT(A) has correctly computed the financial indicator of the assessee under the indenting segment at 8.44% ( 24,94,835/2,95,50,194). We uphold the same and dismiss this ground of the revenue.

Issues Involved:
1. Delay in filing the appeal.
2. Determination of arm's length price (ALP) using the Transactional Net Margin Method (TNMM) vs. transaction-by-transaction approach.
3. Rejection of Comparable Uncontrolled Price (CUP) Method for benchmarking the transaction of purchase of raw materials/components.
4. Computation of royalty and consideration of standard vs. non-standard materials.
5. Financial indicator for the indenting activity segment.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal filed by the assessee had a delay of five days. After reviewing the petition for condonation, the tribunal found sufficient cause for the delay and admitted the appeal.

2. Determination of ALP Using TNMM vs. Transaction-by-Transaction Approach:
The assessee applied TNMM at the entity level for its international transactions, which was not accepted by the TPO for specific transactions. The TPO adopted a transaction-by-transaction approach and directed ALP adjustments. The CIT(A) deleted these adjustments, noting that the transactions involving purchase of raw materials and payment of royalty were closely linked and justified under TNMM at the entity level. The tribunal upheld the CIT(A)'s decision, referencing various case laws supporting the aggregate benchmarking approach under TNMM for closely linked transactions.

3. Rejection of CUP Method for Benchmarking the Transaction of Purchase of Raw Materials/Components:
The TPO applied the CUP Method, comparing prices paid by the assessee to associated enterprises with those paid to unrelated suppliers. The CIT(A) rejected this method, noting the TPO's failure to consider factors like geographical location and volume of purchase. The tribunal upheld the CIT(A)'s decision, citing case laws that emphasized the importance of comparability factors in applying the CUP Method.

4. Computation of Royalty and Consideration of Standard vs. Non-Standard Materials:
The assessee paid royalty based on a formula approved by the SIA and RBI, deducting the cost of standard items from the net selling price. The TPO included both standard and non-standard items in the deduction, leading to an ALP adjustment. The CIT(A) accepted the assessee's method, noting the approval of the royalty agreement by regulatory authorities. The tribunal upheld the CIT(A)'s decision, referencing case laws that supported the arm's length nature of royalty payments approved by the RBI and SIA.

5. Financial Indicator for the Indenting Activity Segment:
The TPO computed the financial indicator of the indenting segment based on sales generated by the associated enterprise in India, leading to an ALP adjustment. The CIT(A) noted that the profit earned by the assessee from indenting activities should be compared to the commission earned, not the sales revenue of the associated enterprise. The tribunal upheld the CIT(A)'s decision, referencing case laws that supported the correct computation of financial indicators for indenting activities.

Conclusion:
The tribunal upheld the CIT(A)'s order on all grounds, dismissing the revenue's appeal. The decisions were based on detailed analysis and supported by relevant case laws, ensuring the application of appropriate transfer pricing methods and principles.

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