2020 (12) TMI 49 - AT - Income Tax

TP Adjustment - TPO rejected the CUP as MAM and conducted the independent economic study and separate analysis has been made and held that TNMM is most appropriate method for both purchase and sale transactions - HELD THAT - The assessee had purchased the raw material from its AE and the AE has supplied the raw material to the tax payer on back to back basis without marking up for any costs or expenses or profit. AE has made purchases from third party vendor which is uncontrolled transaction and the supplies made by the AE to the taxpayer are controlled transaction. The price charged by the AE to the taxpayer is less or equal to the uncontrolled transaction. This fact was also demonstrated by the assessee in respect of purchases made from Saravana Spinning Mills by the assessee through the AE. AO has not demonstrated that the price charged in controlled transaction is more than the uncontrolled transaction with any proof or evidence. TPO also did not bring any material to show that the internal CUP is not acceptable or any restrictions are placed by the Income Tax Act to consider internal CUP as comparable. It is also undisputed fact that supplier of the material is not related party of the AE. No reason to reject the transfer pricing study of the assessee and to accept CUP as most appropriate method in respect of purchases. Accordingly we set aside the orders of the lower authorities and direct the AO to adopt CUP as most appropriate method for purchases. Sale price charged by the assessee to its AE - In the instant case sufficient data and information is available to show that the sale price charged by the assessee to its AE is comparable and internal comparables are available which were placed by the assessee before the TPO as well as the DRP. No valid reason was assigned for rejecting the method adopted by the assessee. The AO simply brushed aside the internal report with regard to sale price without bringing any evidence to show that the sale price charged to the AE is incorrect. When the assessee has given complete documentation to the TPO / DRP the burden shifts on AO/TPO to establish that the method adopted by the assessee is faulty. We observe that the sale price charged to AE is more or equal to Non AEs and the assessee has furnished the complete information before the AO/TPO. The Department has not brought on record to controvert the submission of the assessee to establish that the assessee has charged the less price than third party buyers. The assessee has relied on various decisions cited supra to support their contention with regard to CUP as MAM in respect of sales. Therefore we hold that CUP is most appropriate method for sales as well as purchases. We therefore direct the AO to adopt CUP as most appropriate method and delete the additions made by the AO/TPO. The appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the approach of the Transfer Pricing Officer (TPO) and the adjustments made to the transfer price.
2. Rejection of the Comparable Uncontrolled Price (CUP) method and adoption of the Transactional Net Margin Method (TNMM) as the most appropriate method.
3. Use of non-contemporaneous data and rejection of adjustments for peculiar economic conditions.

Issue-wise Detailed Analysis:

1. Validity of the TPO’s Approach and Adjustments:
The assessee challenged the order of the Assistant Commissioner of Income-tax and the TPO, arguing that the adjustments made to the transfer price of INR 31,07,79,932/- were erroneous. The assessee contended that the international transactions with Associated Enterprises (AEs) complied with the arm's length principle. The TPO had rejected the assessee's Transfer Pricing (TP) documentation and comparability analysis, leading to the adjustments. The Dispute Resolution Panel (DRP) upheld the TPO's approach, leading to the appeal.

2. Rejection of the CUP Method and Adoption of TNMM:
The TPO rejected the CUP method used by the assessee for both purchases and sales transactions, arguing that the back-to-back invoices could not form a valid CUP. The TPO instead adopted TNMM as the most appropriate method, using previous year's data and certain comparable companies to arrive at an arithmetic mean of 6.78% OP/OC. The assessee argued that the CUP method was valid as the prices paid to AEs were comparable to those paid to third-party suppliers. The Tribunal found that the assessee had demonstrated the purchases were at arm's length, as the AE did not add any profit or extra cost to the back-to-back transactions. The Tribunal cited guidelines from the Institute of Chartered Accountants of India and previous ITAT rulings, which preferred internal CUP over external CUP.

3. Use of Non-Contemporaneous Data and Rejection of Adjustments:
The TPO used previous year's data instead of contemporaneous data, which the assessee objected to. The DRP upheld the TPO’s approach, stating that the assessee failed to establish that using earlier financial years' data would result in adverse results. The Tribunal noted that the TPO and DRP did not consider the adjustments requested by the assessee for start-up losses, under-utilization of capacity, and other peculiar economic conditions. The Tribunal found that the TPO and DRP's rejection of these adjustments was not justified, as the assessee had provided sufficient data to show that the sale prices charged to AEs were comparable to those charged to third parties.

Conclusion:
The Tribunal concluded that the CUP method was the most appropriate for both purchases and sales, as the assessee had demonstrated that the transactions were at arm's length. The Tribunal set aside the orders of the lower authorities and directed the AO to adopt the CUP method, thereby deleting the adjustments made by the TPO. The appeal filed by the assessee was allowed, and the Tribunal did not find it necessary to adjudicate the other grounds raised by the assessee.