Facts of the Case

The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal dated 08.06.2021 for Assessment Year 2016-17. The Tribunal had allowed the assessee’s appeal and deleted a transfer pricing adjustment of ₹3,61,32,20,620/- made by the Transfer Pricing Officer in respect of international transactions relating to marketing support services rendered by the assessee to its Associated Enterprises.

 

Issues Involved

  1. Whether the Transfer Pricing Officer was justified in rejecting the Transactional Net Margin Method (TNMM) adopted by the assessee.
  2. Whether adoption of the residual “other method” under Rule 10B(1)(f) read with Rule 10AB was valid in law.
  3. Whether comparables selected by the TPO were functionally similar to the assessee’s international transactions.
  4. Whether the Tribunal erred in deleting the transfer pricing adjustment.
  5. Whether any substantial question of law arose for consideration under Section 260A.

 

Petitioner’s (Revenue’s) Arguments

  • The assessee operated as a commission agent and did not undertake buy-sell operations, making TNMM inappropriate.
  • Suitable comparables were not available for benchmarking under TNMM.
  • The TPO was justified in adopting the “other method” akin to a modified CUP method using data from Royaltystat.
  • The Tribunal erred in rejecting the comparables selected by the TPO and in disregarding the findings of the Dispute Resolution Panel.

 

Respondent’s (Assessee’s) Arguments

  • TNMM had been consistently accepted as the most appropriate method in earlier assessment years from AY 2009-10 to AY 2014-15.
  • The TPO rejected TNMM without recording any cogent reasons.
  • Selection of inappropriate comparables relating to royalty, non-compete and technology licensing agreements vitiated the adjustment.
  • The “other method” under Rule 10AB could not be invoked without first rejecting all other methods with proper justification.

 

Court Order / Findings

  • The High Court held that TNMM, having been consistently accepted in earlier years, could not be rejected without cogent and substantial reasons.
  • The TPO had failed to record any valid reasons for discarding TNMM and had merely criticised the choice of comparables, which was insufficient.
  • Before invoking the residual “other method” under Rule 10AB, it was mandatory to justify rejection of all other prescribed methods, which was not done.
  • Several comparables adopted by the TPO, such as non-compete agreements and royalty-based licensing arrangements, were found to be functionally dissimilar.
  • The Tribunal’s findings were based on appreciation of facts and law and did not suffer from perversity.

 

Important Clarification

The Court reiterated that although res judicata does not strictly apply to income-tax proceedings, consistency in the method of transfer pricing analysis is crucial. A departure from an accepted method without statutory change or material difference in facts leads to uncertainty and is impermissible in law.

 

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal deleting the transfer pricing adjustment and held that no substantial question of law arose for consideration under Section 260A of the Income Tax Act, 1961.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770114832_THEPR.COMMISSIONEROFINCOMETAX7VsSABICINDIAPVTLTD.pdf 

 

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