Transfer Pricing Officer Cannot Cherry-Pick Transactions When Transactional Net Margin Method Is Accepted: ITAT Mumbai
The Income Tax Appellate Tribunal (ITAT) Mumbai has held that once the Transactional Net Margin Method (TNMM) is accepted for benchmarking all international transactions, the Transfer Pricing Officer (TPO) cannot cherry-pick only the management fee and assign an Arm's Length Price (ALP) at NIL. In the case in hand, the assessee had preferred an appeal before the ITAT seeking deletion...
The Income Tax Appellate Tribunal (ITAT) Mumbai has held that once the Transactional Net Margin Method (TNMM) is accepted for benchmarking all international transactions, the Transfer Pricing Officer (TPO) cannot cherry-pick only the management fee and assign an Arm's Length Price (ALP) at NIL.
In the case in hand, the assessee had preferred an appeal before the ITAT seeking deletion of the Transfer Pricing adjustment on management fees and the consequential enhancement of income, being aggrieved by the directions issued by the Dispute Resolution Panel (DRP) under Section 144C(5) of the Income Tax Act, 1994.
The assessee is a company in the international freight forwarding business and part of the Logwin Group, had compared all the international transactions with group companies including the payment of management fees using the TNMM method.
The assessee's return of income was selected for scrutiny pursuant to which the statutory notices u/S 143(2) and u/S 142(1) (assessment) were issued and served on the assessee.
Thereafter, the TPO issued show cause notice to the assessee and rejected the benchmarking done by the assessee isolating the management fee, and thereby made Transfer Pricing adjustment.
Before the Tribunal, the assessee argued that if the company is already earning a much higher profit than comparable businesses even after including the management fee cost, then there is no basis to say that the management fee should be valued at NIL.
The Tribunal observed that no Transfer Pricing adjustment could be made on Management Fees since all international transactions were benchmarked together under TNMM and the assessee's overall operating margin (7.52%) was significantly higher than that of comparable companies (0.91%), the management fee was already part of the operating cost base considered in the TNMM benchmarking. Therefore, it is impermissible to isolate the management fee transaction and determine its Arm's Length Price (ALP) at NIL.
Accordingly, the entire Transfer Pricing adjustment of ₹1,04,21,731 was deleted.
On the second issue concerning Section 41(1) addition (₹16,57,766 Lufthansa ledger difference) the Tribunal observed that the same was not justified without factual examination, as the Dispute resolution Panel (DRP) wrongly assumed that the Assessing Officer (AO) had not examined the issue, while the assessee's invoice-wise reconciliation required factual verification, and therefore, this issue was remanded to the AO for fresh verification after granting due opportunity.
In view of the above, the Tribunal partly allowed the appeal preferred by the assessee by deleting the Transfer Pricing adjustment, while the Section 41(1) issue was remanded to the AO for factual verification.
CASE NUMBER: ITA NO. 6680/MUM/2024
CASE TITLED: LOGWIN AIR & OCEAN INDIA PRIVATE LIMITED VS ASSISTANT COMMISSIONER OF INCOME TAX 3(1)(1)