Facts of the Case


The assessee company was engaged in the business of sale of airtime, rental of handsets, and supply of SIM cards. It filed its income tax return declaring losses for the relevant assessment year 2009–10.

During scrutiny assessment, the Assessing Officer noticed international transactions with Associated Enterprises (AEs) and referred the matter to the Transfer Pricing Officer under Section 92CA(1).

The TPO accepted TNMM as the Most Appropriate Method but rejected adjustments claimed by the assessee regarding:

  1. Unutilized capacity adjustment
  2. Human resource expenses
  3. Administrative expenses
  4. Advertisement and publicity expenditure

Consequently, transfer pricing adjustments were made.

The assessee challenged the assessment before the Dispute Resolution Panel (DRP), but the objections were rejected. Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), which held that RPM, and not TNMM, was the correct method because the assessee was engaged purely in resale without any value addition. The Revenue challenged this before the Delhi High Court.

 Issues Involved

  1. Whether the ITAT was justified in adopting RPM as the Most Appropriate Method under Section 92C?
  2. Whether an assessee can seek adoption of a different transfer pricing method at appellate stage after initially adopting TNMM?
  3. Whether RPM is applicable where goods are purchased from Associated Enterprises and resold without value addition?

 Petitioner’s Arguments (Revenue’s Contentions)

The Revenue contended that:

  • The assessee itself had selected TNMM in its transfer pricing documentation.
  • The TPO, AO, and DRP had consistently accepted TNMM.
  • ITAT could not substitute TNMM with RPM at the appellate stage.
  • Such substitution would disturb consistency in transfer pricing analysis.

The Revenue argued that once a method is chosen by the assessee, departure from that method should not be permitted without valid legal basis.

 Respondent’s Arguments (Assessee’s Contentions)

The assessee submitted that:

  • Its business model was purely that of a trader.
  • SIM cards and airtime were purchased and resold without any physical alteration or value addition.
  • RPM had already been used as a secondary method in its transfer pricing study.
  • RPM is the legally recognized method for pure resale transactions.

The assessee argued that the ultimate object of transfer pricing is accurate ALP determination and not procedural rigidity.

 Court Findings / Court Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal.

The Court held:

  • RPM is the most appropriate method where goods are purchased from AEs and resold without value addition.
  • TNMM may not be appropriate where gross margin comparison is more accurate.
  • Merely because TNMM was adopted initially by the assessee does not prevent adoption of RPM later if RPM better determines ALP.
  • Tax authorities and appellate forums are duty-bound to apply the correct legal principle.

The Court concluded that no substantial question of law arose and therefore dismissed the Revenue’s appeal.

 Important Clarification

The Court clarified an important transfer pricing principle:

Selection of a transfer pricing method in the original TP study does not create an estoppel against the assessee or tax authorities.

If another prescribed method more accurately determines ALP, such method can be adopted even at appellate stages.

This judgment reinforces the principle that substance prevails over procedural declarations in transfer pricing matters.

 Sections Involved

Section 92C of the Income-tax Act, 1961 – Computation of Arm’s Length Price
Section 92CA of the Income-tax Act, 1961 – Reference to Transfer Pricing Officer
Section 143(3) of the Income-tax Act, 1961 – Scrutiny Assessment
Section 144C of the Income-tax Act, 1961 – DRP Proceedings
Section 260A of the Income-tax Act, 1961 – Appeal to High Court
Section 14A of the Income-tax Act, 1961 – Expenditure relating to exempt income

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:7186-DB/SRB22112017ITA4842017.pdf

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