Changing the Most Appropriate Method by the Assessee from one selected in TP Study

Section 92C(1) provides that ALP of international transaction and SDT shall be determined by adopting “MAM”, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribed. Rule 10C lays down the guiding principles for selection of most appropriate method.

One of the issues that arises is whether the taxpayer can request AO to apply another method other than which the Assessee has applied in TP report for benchmarking the transaction. This issue is discussed in the following cases:

ACIT v M/s. Chemtex Global Engineers P. Ltd. (2014) 147 ITD 488

During the financial year under consideration, the taxpayer provided engineering consultancy services to its AE. In its transfer pricing report, the taxpayer had applied TNMM as the primary method. During the course of assessment proceedings, the taxpayer also filed details of comparable rates charged to AE vis-à-vis third party (non-AE) and benchmarked the price by applying CUP method in support of the international transactions.

The ITAT held that the Act does not provide that a taxpayer has to choose a particular method for benchmarking its transactions. The ITAT observed that even if a particular method is chosen at the time of furnishing of study report, the taxpayer can always support its transactions with another method. Referring to s 92C(1) and r 10C, the ITAT observed that the AO/TPO has to exercise their judicial discretion in considering as to whether the method/methods adopted by the taxpayer is suitable to the facts of the case and if, in their opinion, the method followed by the taxpayer is not suitable, the AO/TPO has to give show cause notice to the taxpayer before adopting an appropriate method.

In the case of Mattel Toys (I) Pvt. Ltd. v DCIT TS-159-ITAT-2013(Mum)-TP, the taxpayer adopted TNMM as MAM in its TP Study. Before the TPO, it submitted that RPM is the MAM for its distribution activity. The TPO rejected the contention of the taxpayer and held that the taxpayer could not be allowed to change the method in assessment or appellate proceedings. The ITAT held that if on the facts of the case, a particular method would not result into proper determination of ALP, the taxpayer was entitled to opt for another method, even though it had earlier adopted different method. The ITAT held that if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case.

In the case of GEBE Pvt Ltd v DCIT TS-364-ITAT-2013(Bang)-TP, the tax department contended that once the taxpayer had chosen a particular method as MAM then, the taxpayer cannot subsequently change the MAM. The ITAT held that there cannot be any estoppels in taxation matters. If the taxpayer can show that the stand it originally took was not sustainable in law and seeks to take a different stand either in the course of proceedings before the AO or Appellate authorities, the claim of the taxpayer had to be tested on the basis of the applicable provisions of law. It cannot be rejected solely on the basis that it was contrary to the stand which the taxpayer had taken originally. The ITAT held that method chosen cannot be discarded unless there are compelling reasons for the same. The ITAT held that MAM can be changed only if there were any changes in the facts, functionalities or availability of data.

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