The TPO can select any method to determine actual income

Ratio of the Case: In order to determine the true income of an Assessee in a transaction concerned with its Parent in another country, the Transfer Pricing Officer can select methods other then the ones used by Assessee to determine the actual income.

CLR Editorial Notes: The assessee is a wholly owned subsidiary of a US based company, and is in the business of developing software for its parent firm, to be sold and deployed at its clients in the US. The monetary arrangement with the firm is based on the actual cost to develop the software plus 8% markup. The assessee adopted the cost plus Method (CPM) for computing the arm™s length price (ALP) for its international transaction.

In course of the scrutiny assessment proceeding the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s 92 CA(2) of the Act for computing the ALP. The TPO after verifying TP Study report and other documents, proposed 15 additional comparables and also asked the assessee to explain as to why Transaction Net Margin Method (TNMM) shall not be adopted in place of CPM adopted by assessee.

The assesse replied stating that TNMM is similar to CPM except for the reason that CPM is based on gross margins whereas TNMM is based on net margins. TNMM would not be a proper method in view of the fact that many adjustments is required to be made. It was further submitted by the assessee that OECD has recommended that TNMM should be used as a method of last resort. The TPO following the decision of the Hon™ble Supreme Court in case of DIT (International Taxation) v. Morgan Stanley[2007] 291 ITR 416 rejected the CPM adopted by the assessee and held that TNMM is the most appropriate method to compute the ALP of the international transaction of the assessee. The matter was put up to the Tribunal for review.

On hearing the submissions, The Tribunal held:

“It is seen that the assessee has itself accepted that TNMM is similar to CPM excepting that CPM is based on gross margins whereas TNMM is based on net margins. The assessee has also accepted that if proper selection criteria are adhered to application of TNMM would also result in the fact that the price at which the assessee has undertaken the international transactions are at arm™s length. The Hon™ble Punjab & Haryana High Court in the case of Coca Cola India Inc v. Asstt. CIT [2009] 309 ITR 194 has held that merely because the assessee has chosen one of the methods, it does not take away the discretion of the TPO to select any other method which may be considered to be more appropriate for the purpose of determining the true income. It is also a crucial fact that the assessee has not disputed adoption of TNMM by the TPO in the earlier assessment years. In aforesaid view of the matter, we are inclined to agree with the finding of the CIT(A) on this issue. Accordingly, the ground raised by the assessee is dismissed.”


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