Hyderabad Tribunal held that Transfer pricing officer cannot change or reject the method adopted by the assessee without substantiating reasons.  It has held that when assessee has chosen a Most Appropriate Method (MAM) and substantiates it choice in its TP study, it is up to TPO to record and substantiate reasons to show that assessee’s MAM is incorrect.

As per section 92F arms length price means a price which is applied in a transaction between persons other than associated enterprises in uncontrolled conditions. In theory, arm’s length prices are those prices, which are arrived at from negotiations between two unrelated parties. In reality, the prices from such negotiations are influenced by a number of factors, whose effect cannot necessarily be predicted with any certainty. For instance, if two customers buy identical cars on the same day from the same car dealer, one customer would pay the full price Rs. 100000/-, whereas the other customer would be able to negotiate a lower price by citing a quote obtained from another dealer, membership in a buying club or superior bargaining skills. While these two prices differ both are products of arms length negotiation between unrelated parties.Hyderabad tribunal restructures powers of the transfer pricing officer

Methods to Calculate Arm’s Length Price (ALP)

1)      Comparable uncontrolled price method (CUP)

2)      Resale Price Method (RPM)

3)      Cost Plus Method (CPM)

4)      Profit Split Method (PSM)

5)      Transactional net margin method (TNMM)

6)      Such Other method as may be prescribed by the Board

The most appropriate method shall be applied, for determination of arm’s length price, in the prescribed manner. However, where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be arithmetical mean of such prices.

If the variation between the arm’s length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding 3% of the latter, as may be notified, the price at which the international or domestic transaction has actually been undertaken shall be deemed to be the Arm’s Length Price .Hyderabad tribunal restructures powers of the transfer pricing officer

Powers Of Transfer Pricing Officer (TPO)

1)      Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with previous approval of the Commissioner, refer the computation of ALP in relation to the said international or domestic transaction u/s 92C to the TPO.

2)      On a reference having been made to the TPO, he will proceed to compute the ALP after giving an opportunity to the assessee of being heard.

3)      Where any other international transaction other than an international transaction referred under section 92CA(1), comes to the notice of the TPO during the course of the proceedings before him, the provision of the chapter shall apply as if such other international transaction is an international transaction.

4)      In respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the TPO during the course of proceedings before him, the provision of this Chapter shall apply as if such transaction is an international transaction referred to him under sub section 1.

FACTS OF THE CASE

1)       The assessee, a manufacturer of aluminium products, imported raw material from a German company named GMBH and exported aluminium products to it. It applied CUP method to determine ALP of import and CPM for export. I also complied with requirement of section 92E and obtained Form No. 3CEB from Chartered Accountant. It filed loss return.

2)       TPO held that internal CPM method adopted by the assessee (as well as the alternate of internal TNMM supplied by it) for exports to its AE was incorrect and applied external TNMM instead to arrive at an arm’s length adjustment to sales of assessee to GMBH.

3)       However, the Commissioner (Appeals) held that GMBH and assessee were not associated enterprises in terms of section 92A(2)(i), 92A(2)(e) and 92A(2)(m) and, hence, the provisions of transfer pricing could not be invoked at the threshold and assessee could not penalized for making a mistake in filing statutory report in Form No. 3CEB.

CONCLUSION OF THE CASE

1)       The assessee has to establish that the assessee company has exported goods to other parties on similar prices and conditions. Furthermore, most importantly, evidences are to be brought on record by the assessee to show that the prices and other conditions were not influenced by GMBH. That GMBH had no share holding or control or management of assessee company in the impugned assessment year has to be verified by the Assessing Officer. Hence, the issue was to be remitted file of the Assessing Officer to determine whether there existed an AE relationship between the assessee and GMBH as section 92A(2)(i) is attracted in the instant case.Hyderabad tribunal restructures powers of the transfer pricing officer

2)       Section 92A(2)(m) cannot apply as it is a residual provision to define any further relationship as AE relationship and such power to define is solely and absolutely available only with the CBDT. Such power is delegated by the Legislature only to the competent authority i.e., CBDT and the CBDT has not yet prescribed any new relationship of mutual interest so as to be covered by section 92A(2)(m).

3)       With respect to section 92A(2)(e), the assessee company has stated that ‘W’ was a full time director. Further, the assessee company has not denied the finding given by the TPO that W was looking after the purchases and sales of raw material from abroad made by the company, in European market. Hence, in these circumstances since there is no clarity on the issue the issue was remitted to the file of the Assessing Officer to examine in detail the role of ‘W’, as the list of directors filed with the return shows him as ‘Director’ without any specific designation. The Assessing Officer shall investigate as to whether he was effectively acting as executive director and decide appropriately whether section 92CA(2)(e) applies in the instant case

4)       Mere filing of Form 3CEB by the assessee does not automatically imply that section 92A conditions are satisfied and there is an AE relationship. Rather, the specific facts and circumstances of the case have to be analyzed in order to conclude whether or not an AE relationship actually exists.

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