INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Selection of MAM - CPM v. TNMM--Provision of engineering consultancy services to AE--Rejection of CPM adopted by assessee--Reason, clients locations being different and some of non-AEs not situated in India

Assessee rendered engineering consultancy services to its AE abroad and considered CPM as the MAM to benchmark said transaction. TPO adopted TNMM method on the reasoning that clients were located at different geographical location, and prevailing market conditions were different. Also, some of the non-AEs were situated in India, and for this reason, these transactions should not have been treated as valid internal comparables. Held: TPO does indeed have powers, under section 92C(3), where he is, inter alia, of the opinion that MAM for ascertaining ALP has not been used for determination of arm's length price, to proceed with his determination of arm's length price in accordance with section 92C(1) and 92C(2), and, by implication, to adopt what he perceives to be the MAM. However, this can only be done by following the course laid down in proviso to section 92C(3), i.e., by issuing specific show cause notice to that effect by TPO, and reasons so assigned for rejection of the MAM adopted by the assessee, are subject to judicial scrutiny. In the instant case, TPO proceeded on the unproven assumption that scope of such market as consultancy services with respect to oil and gas sector in India was based on location of client and, therefore, it had a bearing on profit margin. Unlike the market for a physical product, market for consultancy services of such a nature is unlikely to be restricted to national boundaries, and, therefore, location of some of the clients at one location or the other would not really matter. In any case, stand of TPO that some of non-AEs were situated in India, and for this reason, these transactions should not have been treated as valid internal comparables was unsustainable in law, inasmuch as, all it can justify at best was exclusion of such transactions within Indian market, rather than rejecting the method, of ascertaining the ALP, itself. Thus, none of the reasons assigned by TPO, for rejection of CPM, was sustainable in law and impugned ALP adjustment by rejecting CPM method adopted by assessee and by adopting TNMM method was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2009-10

INCOME TAX APPELLATE TRIBUNAL RULES, 1963

Rule 34(5)(c)

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