Denso India Limited vs. CIT (Delhi High Court)

Even if TNMM is found acceptable as regards all other transactions, it is open to the TPO to segregate a portion and subject it to an entirely different method i.e. CUP if the assessee does not provide satisfactory replies to his queries (Mar 3, 2016)

The High Court had to consider the question “Whether the Transactional Net Margin Method adopted by the assessee is the most appropriate method envisaged under Section 92C(2) of the Income Tax Act, 1961 read with Rule 10C of the Income Tax Rules, 1962 and whether the Income Tax Appellate Tribunal had erred in directing the Assessing Officer to apply Comparable Uncontrolled Price Method?” HELD by the High Court:

(i) The narrow controversy which this Court is called upon to decide is as to whether the adoption of the CUP method by the revenue authorities was justified. What the assessee urges essentially is that whereas the TP report furnished by it applied the TNMM method which was found acceptable as regards all other transactions/business activities, it was not open to the revenue to segregate a portion and subject it to an entirely different method, i.e. CUP. The assessee relies upon paras 3.6, 3.9 and 3.10 of the OECD guidelines in support of its contentions. It also relies upon certain rulings of different Benches of the ITAT to urge that such sequential segregation and setting portion of the TP exercise – so to say, to break with the integrity is unjustified and unsupported by the text of the law, i.e. Section 92C of the Income Tax Act. The assessee also relies upon Rule 10E of the Income Tax Rules, which guide the proper approach of the TPO in such matters.

(ii) The cumulative effect of various provisions of the Income Tax Act, notably Sections 92, 92C, 92D and 92E read together with Rule 10B and 10D is the obligation to discern, if in a given set of circumstances, the assessee has disclosed international transactions, as well as an ALP. The ultimate purpose of this exercise- the primary onus of which is upon the assessee, is to ensure that no amount which is otherwise to be designated or treated as income, under law, escapes assessment. The assessee’s TP report is to be accurate and based on materials; its explanations for the queries raised by the TPO, convincing and reasonable. The underlying emphasis of the law (Section 92-C) is that the method appropriate to the transaction, amongst the four specified ones, is to be applied.

(iii) The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components (which constituted over 85% of the raw materials imported and about 38% of the total raw materials sourced) was also connected with both the assessee and the manufacturer. If these realities emerged during the TP exercise, compelling the TPO to closely scrutinize the value of such imports and seek further details from the assessee, to justify its decision, the onus was clearly on the latter to afford a convincing and reasonable explanation. Such of the explanations that were forthcoming, were apparently unconvincing. What the assessee banks upon in its appeal to this Court is the unbending and inflexible acceptance of its TP exercise; according to its logic, a “bundled” or aggregated series or chain of transactions used in the TP report should remain undisturbed. Now, there can be no dispute that the AO would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan. The “second test” spoken of in Sony Ericcson (supra) i.e “the form and substance of the transaction were the same but the arrangements made in relation to a transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner..” was in effect adopted. This Court finds no infirmity in this approach. As a result, the question framed is answered against the assessee and in favour of the revenue (Commissioner of Income Tax v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del) and Sony Ericsson Mobile Communications India (P) Ltd v Commissioner of Income Tax (2015) 374 ITR 118 (Del) followed).

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