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TMI Blog2024 (10) TMI 1283X X X X Extracts X X X X X X X X Extracts X X X X ..... d justification for rejection of the TNMM. Thus, the Tribunal has rightly concluded that the TPO s decision to reject TNMM as the most appropriate method was without reasons. TPO s decision to adopt the residual method any other method under Rule 10B (1) (f) of the Rules - Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only if none of the other methods are considered as the most appropriate method. However, as noted above, the TPO had provided no reasons for rejecting TNMM, which had been used in earlier years. The TPO had also not discussed the applicability of any other methods. Tribunal had referred to the Guidelines issued by the Institute of Chartered Accountants of India (hereafter the Guidelines) in regard to use of Other method under Rule 10AB of the Rules. Guidelines rightly observe that the Rule 10AB of the Rules does not describe any methodology but provides flexibility to determine the price in complex transactions where third party compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order dated 31.03.2021 (hereafter the assessment order) framed under Section 143 (3) of the Act read with Section 144C (13) of the Act, for the assessment year (hereafter AY) 2016-17. The assessee was aggrieved by the enhancement of its total income by a sum of Rs. 3,61,32,20,620/- on account of transfer pricing adjustment in terms of the order passed by the Transfer Pricing Officer (TPO). The assessee s appeal was allowed by the Tribunal. 3. The assessee had filed its return of income on 25.11.2016 in respect of AY 2016-17 declaring a total income of Rs. 77,82,14,150/-. The said return was picked up for scrutiny and a notice was issued under Section 143 (2) of the Act. The assessee had during the year in question entered into international transactions with its Associated Enterprises (AEs) and accordingly, the assessee s case was referred by the Assessing Officer (AO) to the TPO for examining whether the international transactions between the assessee and AEs were on an arm s length basis. 4. The assessee furnished its transfer pricing studies to the TPO. The assessee had adopted the transactional net margin method (TNMM) to benchmark its international transactions. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions relating to payment for training and SAP related expenses were considered as inextricably linked to the activities carried out by the assessee and therefore, no separate benchmarking study was undertaken. 10. The assessee had selected TNMM as the most appropriate method and had used the ratio of Operating Profits/Value Added Expenses (OP/VAE) and Gross Profit/Value Added Expenses (GP/VAE) as the profit linked indicators (PLI) to benchmark the international transactions. On the basis of certain comparables found as the comparable entities, the assessee had submitted its analysis as under: PLI Tested party s operating margin Comparable companies average (without working capital adjustment) Comparable companies average (after working capital adjustment) OP/VAE 369.39% 25.13% -23.08% GP/VAE 469.39% 125.13% 76.92% 11. The assessee had also furnished its agreements with AEs and had disclosed the fees received as percentage of sales for various products as under: (a) All Chemical Products 0.9% (b) Plastic Products 2.0% (c) PVC 1.5% (d) All fertilizer product 0.5% of the consideration collected from the customers. 12. The TPO conducted a search of the available data base and noted cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow: Particulars Amount (INR) Sales generated by the AEs in India [A] 89,84,87,07,000/- Arm s length rate of commission (%) [B] 5.00% Commission income at ALP [C=A*B] 4,49,24,35,350/- Commission income of taxpayer [D] 87,92,14,730/- Adjustment u/s 92CA [E=C-D] 3,61,32,20,620/- 16. Based on the order dated 29.10.2019 passed by the TPO, the AO framed a draft assessment order, which was appealed by the assessee before the Dispute Resolution Panel (DRP). The assessee assailed the decision of the TPO to reject TNMM and adopt another method. Additionally, the assessee also assailed the comparables as selected by the TPO on the ground that the same did not meet the comparability criteria. The DRP did not find any fault with the decision of the TPO in rejecting the TNMM and held that the TPO had furnished sufficient reasons justifying the application of the other method as provided under Rule 10AB of the Rules. Insofar as comparables selected by the TPO are concerned, the DRP accepted the assessee s objection to include the following comparables: (i) L17961 Maciej Zalewski Trustee; Maciej Zalewski, an individual and Polymer Energy LLC, (ii) L11144 Bioshield Technologies Inc. and Sanitary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed assets, Berry ratio would not be an apposite PLI as the value of tangibles as well as the value added by substantial fixed assets would not be captured in the operating cost. 21. In Li Fung India Pvt. Ltd. v. Commissioner of Income Tax (supra), the Court considered a case where the assessee had received service charges of 5% of cost plus markup for providing buying services for sourcing garments, handicrafts, leather products in India for its AE. In the said case, the Court upheld the use of TNMM as the most appropriate method and further held that once the transactional net margin method was deemed the most appropriate method, the distortions, if any, had to be addressed within its framework . 22. The Tribunal also referred to the Guidelines issued by the Institute of Chartered Accountants of India (ICAI) in support of the conclusion that it would be necessary for the TPO to provide reasons for rejecting all other five methods [as specified in Clauses (a) to (e) of Rule 10B (1) of the Rules] while selecting the other methods. 23. In addition to the above, the Tribunal also faulted the DRP for rejecting some of the objections raised by the assessee in respect of the comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been followed earlier, could not have been rejected by the TPO without any substantial reason. 27. In M/s Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC), the Supreme Court had observed as under: 11. One of the contentions which the learned senior counsel for the assessee-appellant raised at the hearing was that in the absence of any change in the circumstances, the Revenue should have felt bound by the previous decisions and no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras High Court considered this question in T.M.M. Sankaralinga Nadar Bros. v. CIT 4 ITC 226 . After dealing with the contention the Full Bench expressed the following opinion: The principle to be deduced from these two cases is that where the question relating to assessment does not vary with the income every year but depends on the nature of the property or any other question on which the rights of the parties to be taxed are based, e.g., whether a certain property is trust property or not, it has nothing to do with the fluctuations in the income; such questions if decided by a Court on a refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a different view of the matter and if there was no change it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12. 28. There is no cavil that the assessment in respect of each assessment year is a separate proceeding/case and therefore, the principle of res judicata does not strictly apply for assessment of income tax in other years. Having stated the above, it is also necessary to bear in mind the merits of adopting a consistent approach. Inconsistencies in the approach in assessment of tax on annual basis, would be debilitating to a conducive commercial environment. A change in the approach of assessment of tax, absent any statutory change, leads to uncertainty as to the cash flow/fund flow, which are the lifelines of commercial ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or similar uncontrolled transaction, with or between non associated enterprises, under similar circumstances, considering all relevant facts . Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only if none of the other methods are considered as the most appropriate method. However, as noted above, the TPO had provided no reasons for rejecting TNMM, which had been used in earlier years. The TPO had also not discussed the applicability of any other methods. 32. As noted above, the Tribunal had referred to the Guidelines issued by the Institute of Chartered Accountants of India (hereafter the Guidelines) in regard to use of Other method under Rule 10AB of the Rules. 33. The Guidelines rightly observe that the Rule 10AB of the Rules does not describe any methodology but provides flexibility to determine the price in complex transactions where third party comparable prices/transactions may not exist. The said method would be most appropriate in cases where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the ALP. The DRP had allowed the objections in respect of some of the comparable entities but had rejected the assessee s objections in respect of the others. The Tribunal had also found that the TPO had used certain comparable entities as included by the TPO and accepted by the DRP related to payment of a royalty pertaining to know-how, patent and process technology, which could not be accepted. The Tribunal also found that the findings of the DRP in case of a comparable as conflicting. The Tribunal noted that for one of the comparables (L17961 Maciej Zalewski Trustee; Maciej Zalewski), the DRP had rejected the use of the said entity as a comparable on the ground that the licensee was a manufacturer of machinery and equipment. However, the DRP had accepted another comparable (L6245 Zbigniew Torkaz) even though it was submitted that the Agreement was identical to the Agreement with L17961 Maciej Zalewski Trustee; Maciej Zalewski. The order passed by the TPO as well as the DRP clearly indicates that some of the comparable transactions as used could not have been considered as comparable transactions. 36. Rule 10AB of the Rules expressly contemplates adoption of a method which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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