Facts of the Case

The assessee, McCain Foods India Pvt. Ltd., adopted the Resale Price Method (RPM) for benchmarking its international transactions for transfer pricing purposes. However, the Transfer Pricing Officer (TPO) rejected RPM and applied the Transactional Net Margin Method (TNMM) as the most appropriate method for determining ALP.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] reversed the findings of the Assessing Officer (AO) and accepted RPM. The Income Tax Appellate Tribunal (ITAT) affirmed the order of CIT(A).

Additionally, the Assessing Officer treated the seed development/agronomy expenditure incurred by the assessee as capital expenditure, whereas the CIT(A) and ITAT held it to be revenue expenditure.

Aggrieved by the ITAT’s order, the Revenue preferred an appeal before the Delhi High Court.

 Issues Involved

  1. Whether the adoption of RPM instead of TNMM for determining Arm’s Length Price raises a substantial question of law?
  2. Whether seed development/agronomy expenditure incurred by the assessee is capital expenditure or revenue expenditure?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that the assessee’s adoption of RPM was incorrect and that TNMM was the appropriate method for benchmarking the international transactions.
  • It was argued that the TPO had rightly rejected RPM and applied TNMM considering the nature of the transactions.
  • On seed development expenditure, the Revenue contended that such expenditure resulted in enduring benefit and therefore should be treated as capital expenditure.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee maintained that RPM was the correct and most appropriate method for determining ALP in the given factual matrix.
  • It was argued that both CIT(A) and ITAT correctly appreciated the facts and rightly restored RPM.
  • Regarding seed development/agronomy expenditure, the assessee contended that such expenditure was operational and recurring in nature, hence revenue expenditure.

 Court Findings / Observations

1. On RPM vs TNMM (Transfer Pricing Issue)

The Delhi High Court held that mere disagreement between the assessee and the Revenue authorities regarding the selection of transfer pricing methodology does not automatically give rise to a substantial question of law.

The Court clarified that only where the application of a particular method leads to distortion or prejudice could a question of law arise.

In the present matter, no such distortion or prejudice was established.

The Court also noted an important factual aspect that in the subsequent assessment year, the TPO himself accepted RPM as the appropriate method.

Therefore, no substantial question of law arose on this issue.

 2. On Seed Development/Agronomy Expenditure

The High Court observed that the CIT(A) and ITAT had recorded factual findings holding the expenditure to be revenue in nature.

Since the finding was purely factual and did not involve any substantial question of law, interference under Section 260A was not warranted.

 Court Order / Final Decision

The Delhi High Court dismissed the Revenue’s appeal and held that:

  • No substantial question of law arose regarding the adoption of RPM over TNMM.
  • No substantial question of law arose regarding the treatment of seed development/agronomy expenditure as revenue expenditure.

Accordingly, the appeal filed by the Revenue was dismissed.

 Important Clarifications / Legal Principles Established

Transfer Pricing Clarification

  • Mere difference in selection of transfer pricing methodology (RPM or TNMM) does not automatically create a question of law.
  • High Court interference under Section 260A requires demonstration of legal perversity, distortion, or prejudice.

Capital vs Revenue Expenditure Clarification

  • Where lower appellate authorities have recorded factual findings regarding expenditure nature, High Court will ordinarily not interfere unless substantial legal issue exists.

    Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6862-DB/SRB13112017ITA9652017.pdf 

    Disclaimer

    • This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.