2023 (10) TMI 212 - HC - Income Tax

TP Adjustment - MAM selection - ITAT justification in holding internal TNMM as the most appropriate method even when the transfer pricing documentation using internal TNMM were not filed before the AO - HELD THAT - As on behalf of the appellant/revenue it was not demonstrated as to how change in MAM would produce better or more appropriate arms length price in the facts of the present case. Tribunal gave detailed reasons for arriving at a conclusion that internal TNMM and not CUP method would be the most appropriate method. Tribunal observed that the assessee had demonstrated the kind of services rendered by it to its AEs as well as non-AEs by placing reliance on agreements and it was argued before the Tribunal that the assessee deals with AEs as well as independent parties being network partners in all regions of the world wherever there were no affiliates of the parent company of the assessee; that agreements of the respondent/assessee with its AEs and non-AEs were in equal ratio; that the DRP had rejected internal TNMM because the respondent/assessee had not carried out an internal FAR and proper identification of revenue and costs vis- -vis the audited accounts. With these observations, Tribunal set aside the order passed by the TPO and Assessing Officer and directed assessee to carry out internal FAR and identify proper revenue and costs vis- -vis the audited accounts to establish internal comparability under TNMM as MAM - Tribunal proceeded further and held that if the respondent/assessee failed to demonstrate the internal FAR and identification of proper revenue and costs vis- -vis the audited accounts, it would file details in respect of external comparables under TNMM as MAM and the TPO would decide the issue as per law. As mentioned above, during the pendency of this appeal, the TPO held that it is the external TNMM which should be applied as the MAM. Reasoning of Tribunal in the impugned order robust and without any flaw. For, the ultimate aim of the transfer pricing exercise is to determine an accurate value of the arms length price for the purpose of taxation and as laid down in the above cited judicial precedents, the appellate authorities are not precluded from adopting a method different from that adopted by the assessee in transfer pricing report. No substantial question of law.

Summary

Issues Involved:

1. Legality of the ITAT's direction to use internal Transactional Net Margin Method (TNMM).
2. Justification of ITAT's holding of internal TNMM as the most appropriate method.
3. ITAT's interpretation of tolerance limit under Section 92C of the Income Tax Act.

Summary:

Issue 1: Legality of ITAT's Direction to Use Internal TNMM

The revenue challenged the ITAT's order directing both the assessee and the Assessing Officer to use internal TNMM under Section 92C of the Income Tax Act, 1961 read with Rule 10B of the Income Tax Rules, 1962. The Tribunal's decision was contested on the grounds that the internal TNMM was not initially used by the assessee in its transfer pricing report, and the record of Functional Assets & Risk Analysis (FAR Analysis) was not available. The court found that the Tribunal had the authority to adopt a different method if it deemed it more appropriate for determining the arm's length price, referencing judicial precedents like *Matrix Cellular* and *Dentsply India*.

Issue 2: Justification of ITAT's Holding of Internal TNMM as the Most Appropriate Method

The ITAT's decision to hold internal TNMM as the most appropriate method was justified despite the transfer pricing documentation using internal TNMM not being filed before the Assessing Officer. The Tribunal observed that the respondent/assessee had demonstrated the kind of services rendered to its Associated Enterprises (AEs) and non-AEs, and agreements were in equal ratio. The Tribunal directed the respondent/assessee to carry out an internal FAR and identify proper revenue and costs vis-à-vis the audited accounts to establish internal comparability under TNMM. The court upheld this reasoning, emphasizing that the appellate authorities are not barred from adopting a method different from that adopted by the assessee if it ensures accurate determination of the arm's length price.

Issue 3: ITAT's Interpretation of Tolerance Limit under Section 92C of the Income Tax Act

The ITAT's interpretation that the tolerance limit stipulated under the proviso to Section 92C of the Act should be allowed in all cases before determining the arm's length price of international transactions was not explicitly discussed in the judgment. However, the court found no substantial question of law arising from this interpretation to warrant further examination.

Conclusion

The court found the Tribunal's reasoning robust and without any flaw, concluding that the ultimate aim of the transfer pricing exercise is to determine an accurate value of the arm's length price for taxation purposes. The appeal was disposed of, with no substantial question of law arising for the court to answer.