2025 (7) TMI 1671 - AT - Income Tax

TP Adjustment - selection of MAM - Specified Domestic Transactions (SDTs) entered into between the eligible and non- eligible units of the assessee - assessee had adopted Internal Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) - HELD THAT - It is a settled position of law that the method selected by a taxpayer as the Most Appropriate Method cannot be rejected without assigning cogent reason. This view is supported by the judgment of Alumeco India Extrusion Ltd 2014 (11) TMI 1297 - ANDHRA PRADESH HIGH COURT Thus we are of the considered view that the internal TNMM adopted by the assessee cannot be rejected as the Most Appropriate Method without assigning any reason. The SCN as well the order of the TPO are completely silent on the reason behind rejecting assessee s internal TNMM as MAM and applying external TNMM by selecting Ten Companies as comparables. In the present case the assessee has compared the operating margin earned by the eligible unit and non-eligible unit of the assessee by applying internal TNMM. The said methodology adopted by the assessee has been summarily rejected by the TPO without assigning any reason. It may be noted that internal TNMM is a well-recognised methodology widely applied for the purposes of computing the Arm s Length Price. Thus we hold that the TPO was not justified in not accepting the internal TNMM of the assessee and was also not justified in applying the external TNMM and make the impugned Transfer Pricing adjustment. Assessee appeal allowed.

Summary

ISSUES:

Whether the Transfer Pricing Officer (TPO) was justified in rejecting the internal Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) without assigning any specific reason and applying external TNMM instead for computing Arm's Length Price (ALP) in respect of specified domestic transactions (SDTs) between eligible and non-eligible units.Whether the comparables selected by the TPO for applying external TNMM were functionally comparable to the assessee for determining ALP.Whether the principle of consistency applies to the choice of transfer pricing methodology across assessment years in the absence of material change.Whether additions/disallowances on account of late deposit of employees' contribution to EPF/ESI are maintainable where contributions were paid before the due date of filing return under section 139(1) of the Income Tax Act, 1961.

RULINGS / HOLDINGS:

The TPO's rejection of the assessee's internal TNMM as the MAM without assigning any cogent reason is not justified; the method selected by a taxpayer as the Most Appropriate Method cannot be rejected without recording and substantiating reasons. The application of external TNMM by the TPO is therefore arbitrary and unsustainable.The ten companies selected by the TPO as comparables for applying external TNMM are functionally dissimilar to the assessee, which is exclusively engaged in manufacturing leather footwear; hence, these comparables are not valid for determining the ALP.The principle of consistency applies in income tax proceedings where there is no material change justifying a different approach; prior acceptance of internal TNMM in earlier assessment years without adjustment precludes arbitrary change in methodology.The additions/disallowances on account of late deposit of employees' contribution to EPF/ESI are not pressed by the assessee and are accordingly dismissed as not pressed.

RATIONALE:

The legal framework involves section 92CA of the Income Tax Act, 1961, which governs transfer pricing adjustments and mandates selection of the Most Appropriate Method for determining ALP in specified domestic transactions.Judicial precedents establish that a taxpayer's choice of transfer pricing method must be accepted unless the Revenue assigns cogent reasons for rejection; arbitrary rejection without reasons violates settled principles (citing CIT-III, Hyderabad vs. Alumeco India Extrusion Ltd.).Doctrine of consistency endorsed by the Supreme Court and High Courts (e.g., M/s Radhasoami Satsang Saomi Bagh v. CIT and CIT v. Neo Poly Pack (P) Ltd.) mandates adherence to prior accepted views in absence of material change, applicable here to transfer pricing methodology.Internal TNMM is a widely recognized and accepted method when available, preferred over external TNMM, supported by multiple coordinate bench decisions of the Tribunal.Functional comparability is essential in selecting comparables for transfer pricing; the TPO's selected comparables differ materially in business activities and product lines from the assessee, rendering them unsuitable.The TPO and Dispute Resolution Panel's failure to provide reasons for rejecting internal TNMM and selecting external comparables constitutes a procedural and substantive infirmity warranting deletion of transfer pricing adjustments.