Transactional Net Margin Method (TNMM) | Transfer Pricing | Case Laws |

1.?????Tata Global Beverages Ltd v DCIT – TS-48-ITAT-2017 (Kol) – TP I.T.A No.511/Kol/2010 I.T.A No.2105/Kol/2010 dated 03.02.2017

The Tribunal deleted the TP addition in the case of the assessee, engaged in the business of manufacture and sale of tea and held that the functions assets and risks of the two segments in which the assessee operated viz. private sales and auction sales, were incomparable as in the private sales the assessee was a mere facilitator assuming minimal risks and in the auction sales it performed significant functions and bore all associated risks. Thus, it rejected the approach of the TPO in aggregating all the AE-related transactions of the assessee viz. AE related private and AE related auction sales and comparing it with the margin of Non-AE auction sales. Accordingly, since the benchmarking adopted by the assessee at first i.e. entity level comparison with other comparable companies engaged in the tea business, was at ALP, the Tribunal deleted the adjustment made by the TPO.

?2.?????Garware Polyester Ltd v DCIT – TS-34-ITAT-2017 (Mum) – TP - I.T.A. No. 6169/Mum/2011 I.T.A. No. 6541/Mum/2011 dated 18.01.2017

The Tribunal, relying on its own order in the assesse’s own case for a prior AY, rejected the CUP applied by the assessee while benchmarking its international transactions of ‘export of polyester films’ to AE's in the UK and US by comparing it with Non-AE transactions in Asia, Africa Middle East, etc. It held that CUP could not be applied due to differences in geography and other economic factors associated with AEs in a developed market (US and UK) vis-a-vis Non-AEs in developing markets(Asia, Africa, Middle-East, etc) and therefore rejected the assessee’s approach of benchmarking AE transactions based on the price charged to Non-AE customers in India as well as TPO’s approach of comparing the same with average Non-AE price on exports to countries in Asia, Latin America. Thus, it held that TNMM was the most appropriate method and remitted the matter to TPO for carrying out benchmarking analysis under TNMM.

?3.?????Madhu Jayanti International Ltd vs. DCIT-TS-1069-ITAT-2017(Kol)-TP I.T.A No. 214/Kol/2016 dated 01.12.2017

The Tribunal rejected TPO’s selection of external TNMM as the most appropriate method (MAM) for benchmarking of assessee’s international transaction of sale of tea to AEs and directed the adoption of internal CPM as MAM. The Tribunal, noting that the assessee had adopted internal CPM for export of tea and export of PP Bags and PP Geo frabric while adopting internal TNMM for export of packaging material and other transactions which was accepted by TPO for AY 2007-08 to 2010-11, held that the TPO erred in taking a different stand in the year under appeal in spite of the similar facts prevailing in the current year when compared to the earlier years and accordingly allowed assessee’s appeal.

?4.?????Satyam Venture Engg. Services (P) Ltd vs Dy.CIT-TS-1072-ITAT-2017(Hyd)-TP ITA No. 1464/Hyd/2014 dated 29.12.2017

The Tribunal held that where the TPO had adopted TNMM as the most appropriate method and the assessee had rendered similar services to both the AEs and non-AEs, and the non-AE transactions satisfied the internal TNMM, the Assessing Officer ought to have considered them for determining ALP. Accordingly, it remitted the issue back to the file of AO and consider internal TNMM where services rendered by the assessee were similar to both AEs and non-AEs.

5.?????Tevapharm India Pvt. Ltd vs Addl CIT – TS-151-ITAT-2017 (Del) – TP ITA No.6707/Del/2016 dated 06.03.2017

The Tribunal rejected the TPO’s CUP as well as the assessee's TNMM for benchmarking the assessee’s international transaction i.e. manufacture and sale of drugs to AEs in the contract manufacturing segment for AY 2012-13 and set aside Rs. 55 Cr TP-adjustment remitting the issue back to TPO for fresh consideration.

It held that the data used by the TPO under CUP (retail prices of products in the CIMS database) was not appropriate as (i) such data related to different years (FY 2015-16), (ii) there was a lack of details of the products sold by the assessee and comparable products used for benchmarking (iii) the TPO only considered one price despite wide fluctuation in the prices charged for the same product by different manufacturers (iv) that the CIMS data related to full-fledged manufacturers as against the assessee which was a contract manufacturer. Further, it noted that the TPO had scaled down the retail prices arrived at from the CIMS data using a factor of 39.6% in order to arrive at ex-factory price, taking assistance from the pricing policy of the Organization of Pharmaceutical Producers, whereas such policy was only applicable to prices charged for products sold in India whereas assessee exported products to its foreign AEs. Accordingly, it held that the CUP method as applied by the TPO was not appropriate. It also rejected the assessee’s benchmarking under TNMM, noting the significant difference in sales price charged to different AEs for similar products despite the cost of production is more or less similar and held that the 4 comparables selected by the assessee could not be selected as comparable as they were full-fledged manufacturers whereas the assessee was engaged in contract manufacturing. Accordingly, it remitted the issue to the file of the TPO for the purpose of carrying out a fresh benchmarking exercise under TNMM by selecting comparables engaged in contract manufacturing.