Monday, June 17, 2013

Assessee can change his method for determining ALP before TPO if it exhibits a better result

Assessee was not precluded to plead before the TPO that the method chosen by him as the most appropriate method ('MAM') was not resulting into proper determination of ALP and some other method should be resorted to. Appellate authorities can take into consideration such a plea before them provided assessee demonstrates as to how a change in the method would produce better or more appropriate ALP in the facts of the case

In the instant case, the assessee was importing toys from its AE and reselling the same in India without any value addition. The assessee in its TP study report chooses TNM Method as MAM which was accepted by the TPO and additions were made by it applying operating gross profit margin as PLI instead of average operating margin chosen by assessee. Assessee contended before CIT(A) that method chosen by it was not MAM and that RPM was MAM. The CIT(A) rejected assessee's contentions and dismissed appeal.  Hence, instant appeal was filed by assessee against CIT(A)'s order.

The Tribunal held in favour of assessee as under:

1) Under the RPM, products similarity was not a vital aspect for carrying out comparability analysis but operational comparability was to be seen. The gross profit margin earned by the independent enterprise in comparable uncontrolled transactions was a guidance factor in this method;

2) This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales;

As the assessee was a distributor of Mattel toys and got the finished goods from its A.E. and resold the same to independent parties without any value addition.  In such a situation, RPM could be the best method to evaluate the transactions whether they were at ALP;

4) Even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it was not precluded from raising the objections before the TPO or the Appellate Courts that such a method was not an appropriate method and was not resulting in proper determination of ALP and some other method should be resorted to;

5) The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it was found that by adopting one of the prescribed methods other than those chosen earlier, the most appropriate ALP could be determined, the assessing authorities as well as the appellate Courts should take into consideration such a plea before them provided, it was demonstrated as to how a change in the method would produce a better or more appropriate ALP. Thus, the impugned order of CIT(A) was set aside - Mattel Toys (I) (P.) Ltd. v. DY. CIT [2013] 34 203 (Mumbai - Trib.)

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