2023 (1) TMI 950 - AT - Income Tax

TP Adjustment - selection of MAM - TNMM or internal CUP - HELD THAT - We find that the assessee is in initial year of operations and has adopted TNMM as most appropriate method. However, in subsequent assessment years and from assessment year 2012-13 onwards, it has followed internal CUP method as most appropriate method and claims that TPO has accepted internal CUP method followed by the assessee. If internal CUP method is most appropriate method to be followed to determine ALP of international transactions of the assessee, then why TNMM has been selected as most appropriate method was not explained by the assessee. Facts remains that when the assessee has adopted internal CUP method for assessment year 2012-13, the TPO has accepted claim of the assessee as claimed by the ld. Counsel for the assessee. Therefore, we are of the considered view that one more opportunity of hearing should be given to the assessee to justify its case with internal CUP method and thus, we set aside the issue to file of the AO/TPO and direct the TPO to re-consider the issue of TP adjustment, after giving one more opportunity of hearing to the assessee to justify its case that internal CUP method is most appropriate method.

Issues:
1. Transfer pricing adjustment towards international transactions with Associate Enterprise (AE).
2. Methodology for determining Arm's Length Price (ALP) of international transactions.
3. Justification for selecting TNMM method over internal CUP method.
4. Consideration of subsequent developments for the assessment year 2012-13.

Transfer Pricing Adjustment towards International Transactions with AE:
The appeal was filed against the final assessment order under sections 143(3) and 144C(13) of the Income-tax Act, 1961, concerning the assessment year 2011-12. The case involved the assessee, a company engaged in manufacturing auto components, which declared a loss in its return of income. The Transfer Pricing Officer (TPO) suggested a downward adjustment in respect of international transactions, leading to proposed TP adjustments by the Assessing Officer (AO). The Dispute Resolution Panel (DRP) upheld the TP adjustments, resulting in the final assessment order by the AO. The appeal before the Tribunal challenged these TP adjustments.

Methodology for Determining ALP of International Transactions:
The assessee initially followed the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the ALP of international transactions with its AE. However, subsequent developments for the assessment year 2012-13 revealed that the internal Comparable Uncontrolled Price (CUP) method was considered the best approach. The assessee argued for a fresh consideration by the AO based on the adoption of the internal CUP method for the later assessment year. The Tribunal found merit in the assessee's argument and directed the TPO to reconsider the TP adjustment issue, allowing the assessee to justify the internal CUP method as the most appropriate approach.

Justification for Selecting TNMM Method over Internal CUP Method:
The Tribunal noted that the assessee, in its initial years of operation, chose TNMM as the most appropriate method for international transactions. However, the subsequent shift to the internal CUP method for the assessment year 2012-13 raised questions about the initial method selection. The Tribunal highlighted the need for the assessee to justify the selection of TNMM over the internal CUP method, especially when the TPO had accepted the latter method in a later assessment year. The lack of explanation for the initial method choice led the Tribunal to set aside the issue for further consideration.

Consideration of Subsequent Developments for Assessment Year 2012-13:
The Tribunal considered the subsequent adoption of the internal CUP method by the assessee for the assessment year 2012-13 and the acceptance of this method by the TPO. This shift in methodology raised concerns about the initial choice of TNMM for the assessment year in question. The Tribunal emphasized the importance of providing the assessee with an opportunity to present arguments supporting the internal CUP method for justifying the TP adjustments. Consequently, the Tribunal allowed the appeal for statistical purposes, directing a re-consideration of the TP adjustment issue based on the internal CUP method.

This comprehensive analysis of the judgment addresses the issues involved in the appeal regarding transfer pricing adjustments, methodology for determining ALP, justification for method selection, and the impact of subsequent developments on the assessment.

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