Any ad-hoc determination of ALP by TPO de-hors Section 92C(1) of the Act cannot be sustained

[Vivek Jalan]

Section 92C(1) of the Act, contemplates that the arms length price in relation to an  international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed methods. Any ad-hoc determination of arms length price by the Ld TPO u/s section 92 de-hors  section 92C(1) of the Act cannot be sustained. The contention is further supported  by the judgment of the Hon'ble jurisdictional High Court in the case of THE COMMISSIONER OF INCOME TAX-6 VERSUS M/S. MERCK LTD. - 2016 (8) TMI 561 - BOMBAY HIGH COURT. In the said case the Hon'ble High Court decline to interfere with the findings of the Mumbai Bench of the Tribunal that  the transfer pricing adjustment made by the TPO without following one of the prescribed methods makes the entire transfer pricing adjustment unsustainable in law. The grievance of the revenue was that the consideration paid to the AE is only  attributable to the services received / availed.

Even incase the benchmarking done by an assessee is not correct, the Transfer Pricing Officer should benchmark the AE payments by applying any of the prescribed methods. However, without applying any prescribed method incase he simply determines the arm’s length price of AE payments, the approach would be considered as not being in accordance with statutory provisions, hence, unsustainable.

In the case of BRINKS INDIA PVT. LTD. (FORMERLY KNOWN AS ‘BRINKS ARYA (INDIA) PRIVATE LTD. ’) VERSUS DY. COMMISSIONER OF INCOME TAX CIRCLE 6 (4) , MUMBAI - 2019 (12) TMI 1238 - ITAT MUMBAI, The international transaction which was  subject matter of dispute was ‘management fees’ paid by the assessee to its AE. To benchmark the transaction the assessee relied on “other method”. The Transfer Pricing Officer (TPO) following the decision in assessment year 2012-13 and 2013- 14 applied CUP as the most appropriate method and thus, made adjustment. The DRP relied on the decision in similar issue in earlier AYs. It was decided that where  TNMM method was applied and accepted in earlier years in respect of management  fees paid/payable by the assessee to its AE, the TPO cannot summarily reject the TNMM and propose an adjustment under the CUP method, without benchmarking with comparable on a separate basis. Incase this is done, it would be considered that the TPO has resorted to an ad-hoc unilateral pricing of management fees, disregarding the facts and circumstances of the case.

See:

CLSA INDIA P. LTD., (FORMERLY CLS INDIA LTD) VERSUS DCIT CIR 4 (1) (1) , MUMBAI - [2020 (3) TMI 1133 - ITAT MUMBAI]