2014 (11) TMI 1297 - HC - Income Tax

TP Adjustment - selection of MAM - compute the value of international transaction by using Internal Cost Plus Method u/s 92CA of the Act instead of External Transaction Net Margin Method - HELD THAT - Tribunal has recorded the fact that when the assessee has chosen a Most Appropriate Method and substantiated the choice in its Transfer Pricing study it is upto the TPO to record and substantiate the reasons as to why the assessee s Most Appropriate Method was incorrect and why some other Transfer Pricing Method need to be the Most Appropriate Method. Tribunal did not find any substance in any of the Transfer Pricing Officer s multiple arguments for rejection of assessee s internal Cost Plus Method and adoption of external Transaction Net Margin Method. In other words it was found by the Tribunal that the decision of the Transfer Pricing Officer was absolutely arbitrary and irrational and hence it set aside the order of the Transfer Pricing Officer.

Summary

The Andhra Pradesh High Court, in a common judgment authored by Chief Justice Kalyan Jyoti Sengupta, dismissed two appeals challenging the Tribunal's order regarding assessment years 2006-07 and 2007-08. The key legal issue was whether the Tribunal erred in directing the Assessing Officer/Transfer Pricing Officer (TPO) to use the Internal Cost Plus Method under Section 92CA of the Income Tax Act instead of the External Transaction Net Margin Method. The Court upheld the Tribunal's finding that once the assessee selects a Most Appropriate Method (MAM) and substantiates it in the Transfer Pricing study, the TPO must provide cogent reasons to reject it and justify an alternative method. The Tribunal found the TPO's rejection of the assessee's Internal Cost Plus Method and adoption of the External Transaction Net Margin Method to be "absolutely arbitrary and irrational." Consequently, the Tribunal set aside the TPO's order. The High Court concluded that there was no substantial question of law warranting interference and accordingly dismissed the appeals "with no order as to costs."