2025 (5) TMI 323 - AT - Income Tax

TP Adjustment - MAM selection - TNMM or CUP - whether TNMM method is the most appropriate method applied by the appellant assessee as against the Comparable Uncontrolled Price (CUP) method applied by the revenue in determining the total income of the assessee? - HELD THAT - We hold that TNMM method (as against the Comparable Uncontrolled Price (CUP) method) adopted by the assessee was the most appropriate method for benchmarking the international transaction of sale/exports of goods. The impugned order related to the transfer pricing adjustment is accordingly set aside. The matter is restored to the file of learned assessing officer for determination of ALP of the assessee s transaction of export of goods to its AE (Omni Active Health Inc. USA) as per TNMM method as adopted by the appellant. The aforesaid point is accordingly determined in positive in favour of the appellant assessee and against the respondent revenue. Assessee s appeal is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal pertain primarily to transfer pricing adjustments under the Income Tax Act, 1961, specifically:

• Whether the upward transfer pricing adjustment of INR 15,93,35,145/- made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO)/Dispute Resolution Panel (DRP) on international transactions relating to export of goods to Associated Enterprises (AEs) was justified.
• Whether the Transactional Net Margin Method (TNMM) adopted by the appellant was the most appropriate method for determining the Arm's Length Price (ALP) as per section 92C(1) of the Act, or whether the Comparable Uncontrolled Price (CUP) method applied by the revenue was appropriate.
• Whether the revenue erred in rejecting the TNMM method and applying the CUP method without due consideration of significant differences such as geographical market, volume of transactions, currency of transaction, and other relevant factors.
• Whether the principle of consistency in transfer pricing methodology, as established by earlier orders of the Tribunal in the appellant's own case, was properly followed or disregarded.
• Whether the impugned assessment order dated 22.07.2024 was barred by limitation and hence void (later withdrawn by the appellant).
• Whether penalty proceedings under section 270A of the Act were rightly initiated by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Appropriateness of Transfer Pricing Adjustment and Methodology Applied (TNMM vs CUP)

Relevant Legal Framework and Precedents: The determination of ALP in international transactions is governed by section 92C of the Income Tax Act, 1961, which mandates the use of the most appropriate method among prescribed methods, including TNMM and CUP. The choice of method must consider the nature of transaction, functions performed, and other relevant factors. The principle of consistency in tax proceedings, unless there is a change in facts or law, is well established by the Apex Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321.

Court's Interpretation and Reasoning: The appellant consistently applied the TNMM method in earlier years for benchmarking international transactions of export of goods to AEs, which was accepted by the revenue and upheld by the Tribunal in multiple preceding years (A.Ys 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, and 2017-18). In the present year, however, the TPO rejected TNMM without providing cogent reasons and applied the CUP method instead, resulting in a significant upward transfer pricing adjustment.

The Tribunal examined the detailed reasoning from the coordinate bench's order dated 19.04.2023 for A.Y. 2017-18, which emphasized that:

• The TNMM method had been consistently accepted in prior assessments and appeals.
• The TPO failed to demonstrate any change in law or facts warranting departure from TNMM.
• The TPO's assertion that CUP was more appropriate was unsupported by verifiable data and was a mere preference without substantive justification.
• The DRP summarily upheld the CUP method without assigning cogent reasons.
• The principle of consistency requires maintaining the same method unless a valid reason exists for change.

Key Evidence and Findings: The appellant submitted audited segmental profitability statements showing higher operating profit to operating cost (OP/OC) ratios in AE transactions (12.65%) compared to non-AE transactions (10.11%). External TNMM benchmarking also supported the arm's length nature of transactions with margins significantly above the median of comparables. The TPO's CUP method ignored critical differences such as geographical market, volume, currency, and sales promotion expenses.

Application of Law to Facts: The Tribunal applied the statutory mandate under section 92C and the established principle of consistency. Since the appellant had consistently applied TNMM with acceptance by the revenue and no change in facts or law had occurred, the rejection of TNMM and adoption of CUP without cogent reasons was held to be unjustified. The Tribunal relied on the Apex Court's ruling in Radhasoami Satsang that consistency should be maintained in income tax proceedings unless there is a change in circumstances.

Treatment of Competing Arguments: The revenue contended that each assessment year is a separate unit and prior decisions do not bind subsequent years. The revenue also cited case law supporting the preference for CUP where data is available. The Tribunal distinguished these precedents on facts, noting the absence of any change in law or facts and the lack of cogent reasoning by the TPO and DRP for rejecting TNMM. The Tribunal rejected the revenue's argument that errors should not be perpetuated, as no error in TNMM application was demonstrated.

Conclusions: The Tribunal concluded that TNMM was the most appropriate method for determining ALP in the appellant's case for A.Y. 2020-21. The transfer pricing adjustment based on CUP was set aside, and the matter was remanded to the AO for determination of ALP as per TNMM. The Tribunal clarified that no addition would be warranted if the appellant's margins in AE transactions were higher than those in non-AE transactions, as contended.

Issue 2: Limitation and Validity of Assessment Order

The appellant initially challenged the validity of the impugned assessment order dated 22.07.2024 on the ground of limitation. However, this ground was withdrawn by the appellant during the proceedings. Consequently, the Tribunal did not adjudicate on this issue.

Issue 3: Initiation of Penalty Proceedings under Section 270A

The appellant contended that penalty proceedings initiated under section 270A were erroneous. However, since the main issue of transfer pricing adjustment was decided in favor of the appellant, and the Tribunal allowed the appeal for statistical purposes, this ground was not elaborately dealt with in the judgment.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is preserved verbatim as follows:

"It is settled law that the consistent method followed can be changed only if there is a change of facts or law. There are various decisions of Hon'ble Apex Court in this regard including that from Radhasoami Satsang (supra). In the present case, there is no case that there is a change of law or there is a change in fact. It is also not the case that TNMM method which has been consistently applied in past was totally wrong method."

"The Transfer Pricing Officer while justifying the change stated that in T.P. report assessee has benchmarked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. Hence, from the above discussion, we find that no cogent reason has been pointed out by the authorities below that the TNMM method applied earlier was not in accordance with the mandate of law as above."

"It is settled law that res judicata does not apply to taxation proceedings but it has fairly often been held by the higher courts including by the Hon'ble Apex Court that the consistency should be maintained in the assessment proceedings. A consistently applied method can be changed only if there is a change in facts and law."

"By no means it is justified to keep on finding a method for addition by trial and error method. Accordingly, on the anvil of aforesaid Hon'ble Apex Court's decision as discussed hereinabove, we hold that there was no justification in rejecting the TNMM method applied by the assessee as in the preceding year."

Core principles established include:

• The principle of consistency in transfer pricing methodology must be respected unless there is a change in law or facts.
• The choice of the most appropriate method under section 92C(1) must be supported by cogent reasons when deviated from prior accepted methods.
• The TNMM method, when consistently applied and accepted, cannot be summarily rejected in favor of CUP without adequate justification.
• Internal CUP method cannot be mechanically applied ignoring significant differences in transaction characteristics.

Final determinations on each issue:

• The transfer pricing adjustment of INR 15,93,35,145/- based on CUP method was set aside.
• TNMM method was held to be the most appropriate method for benchmarking the appellant's international transactions of export of goods.
• The matter was remanded to the AO for determination of ALP as per TNMM method.
• The ground challenging the validity of the assessment order was withdrawn and not adjudicated.
• Penalty proceedings under section 270A were not specifically addressed in the final order due to the appeal being allowed for statistical purposes.