Facts of the Case

The assessee, MakeMy Trip India Pvt. Ltd., was engaged in the travel and tourism business and provided online travel solutions, including airline ticket bookings, hotel reservations, car rentals, and holiday packages. For Assessment Year 2005–06, the assessee filed its Transfer Pricing Study Report adopting the Transaction Net Margin Method (TNMM) as the most appropriate method for benchmarking its international transactions with Associated Enterprises (AEs).

The Transfer Pricing Officer (TPO), however, rejected TNMM and applied the Resale Price Method (RPM), making consequential transfer pricing adjustments. The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the TPO’s findings, holding that RPM was inappropriate due to functional differences between the business segments and upheld TNMM. The Income Tax Appellate Tribunal (ITAT) affirmed the CIT(A)’s decision. Aggrieved by the Tribunal’s findings, the Revenue preferred an appeal before the Delhi High Court under Section 260A of the Income Tax Act.

 Issues Involved

  1. Whether the Tribunal erred in affirming the CIT(A)’s decision accepting TNMM as the most appropriate method for benchmarking international transactions?
  2. Whether the Resale Price Method (RPM) was applicable in the facts and circumstances of the case?
  3. Whether the difference in approach between the TPO and CIT(A) raised a substantial question of law under Section 260A?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that the TPO correctly adopted the Resale Price Method (RPM) for determining Arm’s Length Price.
  • It was argued that the assessee’s sub-agent segment could be benchmarked against its direct customer segment for transfer pricing analysis.
  • The Revenue challenged the Tribunal’s affirmation of TNMM and sought interference by the High Court.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that it was merely performing routine back-office and customer handling services for its AEs without undertaking entrepreneurial risks.
  • TNMM was the appropriate method as the functional profile matched that of comparable service providers.
  • RPM was unsuitable because of the material differences in the functions performed and risks assumed between the sub-agent segment and direct customer segment.
  • The assessee further argued that application of RPM would result in a downward adjustment, which would be contrary to Section 92(3) of the Income Tax Act.

 Court Findings / Observations

The Delhi High Court upheld the Tribunal’s findings and observed:

  • The Tribunal had correctly appreciated the functional profile of the assessee and the economic analysis in the Transfer Pricing Study.
  • TNMM was rightly accepted as the most appropriate method considering the routine service provider character of the assessee.
  • RPM requires a high degree of functional comparability, which was absent in the present case.
  • The TPO incorrectly compared the sub-agent segment with the direct customer segment despite material differences in business functions.
  • If RPM were to be applied, it would necessitate proportionate allocation of AE’s operating expenses, leading to a downward adjustment, prohibited under Section 92(3).

 Court Order / Final Decision

The Delhi High Court held that no substantial question of law arose for consideration under Section 260A. It observed that the dispute regarding selection of the most appropriate transfer pricing method was essentially factual and did not warrant interference unless contrary to Rules 10B and 10C.

Accordingly, the appeal filed by the Revenue was dismissed.

 Important Clarification / Legal Principle Established

  • Selection of the Most Appropriate Method (MAM) in transfer pricing is largely a factual exercise.
  • Courts will not ordinarily interfere under Section 260A unless there is a clear violation of statutory rules.
  • RPM cannot be applied where functional comparability at gross margin level is absent.
  • TNMM is preferable where the tested party is a routine service provider with limited risks.
  • Section 92(3) prohibits transfer pricing adjustments resulting in reduction of taxable income.

 Sections Involved

  • Section 92 – Computation of income from international transactions having regard to Arm’s Length Price
  • Section 92C – Computation of Arm’s Length Price
  • Section 92(3) – Restriction on downward adjustment
  • Section 260A – Appeal to High Court
  • Rule 10B – Determination of Arm’s Length Price
  • Rule 10C – Most Appropriate Method

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6710-DB/SAS07112017ITA8812017.pdf

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