2016 (11) TMI 1628 - AT - Income Tax

TP adjustment - selection of MAM - TNMM OR CUP as the most appropriate method - HELD THAT - The requirement of law is that the most appropriate method suitable for determining the ALP is to be adopted. Merely because the assessee has adopted the CUP method it will not become the most appropriate method. AO after conducting the FAR analysis has to determine the most appropriate method. It has been held time and again that the proceedings before the first appellate authority are continuation of the assessment proceedings itself. It is the bounden duty of the CIT (A) to examine the most appropriate method for determination of the ALP particularly when the assessee itself is challenging the method adopted by it in its TP study. In view of the same we are satisfied that the TNMM is the most appropriate method and therefore we deem it fit and proper to set aside the orders of the authorities below and remand the issue of determination of the ALP to the file of the AO by adopting the TNMM as the most appropriate method

Summary

Issues: Cross appeals for A.Y 2011-12 against the order of the CIT (A)-5, Hyderabad regarding transfer pricing method and Arm's Length Price (ALP) adjustment.

Analysis:
1. Transfer Pricing Methodology:
The assessee, engaged in manufacturing engineering goods, filed its return of income but failed to file Form No.3 CEB along with the return. The Assessing Officer (AO) noticed international transactions with related parties and discrepancies in the Comparable Uncontrolled Price (CUP) method used by the assessee for sales and royalty payments. The AO conducted a Transfer Pricing (TP) study and found the assessee's TP study unreliable. The Transfer Pricing Officer (TPO) identified 18 final comparables and made ALP adjustments.

2. Appeal before CIT (A):
The assessee appealed before the CIT (A), arguing that the TNMM method should have been used instead of CUP. The CIT (A) acknowledged the inappropriateness of the CUP method but upheld it since the assessee initially chose it. However, certain companies were excluded from the list of comparables. The Revenue and the assessee both appealed against the CIT (A)'s decision.

3. Appellate Tribunal's Decision:
The Appellate Tribunal agreed with the assessee that the CUP method was not appropriate due to significant differences between the assessee and comparables in products and market conditions. The Tribunal emphasized that the most appropriate method must be determined based on the highest degree of similarities, even if the assessee initially chose a different method. It held that the TNMM method is more suitable and remanded the issue of ALP determination to the AO. Other grounds raised by the assessee were rejected. Consequently, the Revenue's appeals were rendered infructuous, the assessee's appeal was allowed for statistical purposes, and the Revenue's appeal was dismissed.

4. Conclusion:
The Tribunal's decision highlights the importance of selecting the most appropriate transfer pricing method based on similarities between the assessee and comparables. It underscores the authority's duty to determine the suitable method, even if the assessee initially adopts a different method. The judgment emphasizes the significance of a thorough analysis in transfer pricing matters to ensure a fair and accurate determination of the Arm's Length Price.