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2025 (4) TMI 471 - AT - Income TaxTP Adjustment - Addition of cost sharing charges - HELD THAT - Although the TPO has made a reference of CUP method which was selected in the earlier year however the TPO has not carried out any such exercise for the price charged or paid for the property transferred or the services provided in a comparable uncontrolled transaction. As per Rule 10B of the Income Tax Rules CUP method is a method wherein the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction is identified. Thereafter the said price is adjusted to account for differences if any and the said price is taken to be the Arm s Length Price. As per the said rule for applying CUP method the price charged for property transferred or services provided is required to be identified. However in the present case the TPO has not carried out any such exercise. Therefore simply referring to CUP method without any reference to the actual uncontrolled transaction and the price charged therein clearly indicates that no CUP method is adopted by him. No method has been adopted by the TPO for determining the ALP. The observations of the DRP that the TPO has adopted the Other method as the most appropriate method in our opinion is incorrect since there is no reference to any such method as the TPO has not specifically mentioned the Other method as the most appropriate method. Thus the question that is to be answered is as to whether any adjustment of ALP is in accordance with law if no method has been adopted by the TPO for determination of the ALP. As in the case of CIT v. Johnson Johnson Ltd. 2017 (4) TMI 1281 - BOMBAY HIGH COURT has held that the action of the TPO in determination of ALP without following any of the prescribed methods is incorrect and the addition made is to be deleted on the said reason. The various other decisions relied on by assessee also supports his case to the proposition that in absence of any of the prescribed methods for the determination of the ALP such TP adjustment is not sustainable in law. Since the TPO in the instant case has not adopted any of the prescribed methods for determination of the ALP therefore we hold that the addition made by the Assessing Officer/TPO/DRP is not in accordance with law for which the same has to be deleted. The grounds raised by the assessee are accordingly allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issue in this case revolves around the determination of the Arm's Length Price (ALP) for international transactions related to cost sharing charges paid by the assessee to its Associated Enterprises (AEs). Specifically, the Tribunal considered whether the Transfer Pricing Officer (TPO) correctly determined the ALP at Rs. NIL for these transactions without applying any of the prescribed methods under Section 92C of the Income Tax Act, 1961. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The determination of ALP for international transactions is governed by Section 92C of the Income Tax Act, which mandates the use of prescribed methods such as the Comparable Uncontrolled Price (CUP) method, Resale Price Method, Cost Plus Method, Profit Split Method, Transactional Net Margin Method (TNMM), and any other method prescribed by the Board. The Tribunal referenced several precedents, including decisions from the Bombay High Court and various Tribunal benches, which emphasize the necessity of applying one of these prescribed methods to determine the ALP. Court's Interpretation and Reasoning The Tribunal found that the TPO failed to apply any of the prescribed methods for determining the ALP of the cost sharing charges. Although the TPO mentioned the CUP method, no actual exercise was conducted to compare the price charged in a comparable uncontrolled transaction. The Tribunal also noted the inconsistency between the TPO's order and the Dispute Resolution Panel's (DRP) assertion that the "Other Method" was applied, which was not evidenced in the TPO's documentation. Key Evidence and Findings The assessee provided evidence of services received and benefits derived from the cost sharing arrangements with its AEs. However, the TPO dismissed these claims, arguing the absence of tangible benefits and a lack of demonstration of what an independent entity would pay for similar services. The Tribunal found that the TPO's determination of the ALP at Rs. NIL was not substantiated by any prescribed method, rendering the adjustment invalid. Application of Law to Facts The Tribunal applied the legal requirement that the ALP must be determined using one of the prescribed methods. The absence of such an application by the TPO meant that the adjustment to Rs. NIL was not legally sustainable. The Tribunal referenced multiple cases where similar failures by the TPO to apply a prescribed method resulted in the deletion of the adjustment. Treatment of Competing Arguments The Tribunal considered the DRP's justification for upholding the TPO's adjustment but found it lacking due to the absence of a prescribed method application. The Tribunal also acknowledged the assessee's argument that the TPO's reliance on previous years' orders without conducting a fresh analysis for the current year was inappropriate. Conclusions The Tribunal concluded that the TPO's determination of the ALP at Rs. NIL was invalid due to the failure to apply any prescribed method under Section 92C. Consequently, the adjustment made by the Assessing Officer was not in accordance with the law and was therefore deleted. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning The Tribunal emphasized: "The ALP of an international transaction can be determined only by applying one of the prescribed methods given under section 92C(1) of the Act. If the ALP is determined by TPO by not applying any method at all or by choosing a method which is not prescribed u/s.92C(1) of the Act, then such a determination of ALP frustrates the transfer pricing addition." Core Principles Established The Tribunal reinforced the principle that the determination of ALP must strictly adhere to one of the prescribed methods under the Income Tax Act. Any deviation from this statutory requirement renders the adjustment unsustainable. Final Determinations on Each Issue The Tribunal set aside the order of the Assessing Officer and directed the deletion of the adjustment of Rs. 6,71,58,603/-. The appeal filed by the assessee was allowed in full, emphasizing the necessity of adhering to prescribed methods for ALP determination.
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