Principle of Consistency to be taken into Consideration While Selecting the Most Appropriate Method: Delhi HC
Facts:
1. The assessee, a part of the Sabic group, during the relevant previous year was engaged in provision of marketing support services to the associated enterprise. During the relevant year, the assessee received consideration from associated enterprises for provision of marketing support services.
2. The said transaction was benchmarked applying Transactional Net Margin Method (‘TNMM’) as the most appropriate method, using Operating Profit / Value added expenses (‘OP/VAE’) as the Profit Level Indicator (‘PLI’). The assessee also undertook an alternate benchmarking analysis. There was no dispute regarding the functional profile of the assessee and it was accepted by the TPO that the assessee was only a marketing support service provider and not a trader or a buy-sell entity.
3. The TPO, however, discarded TNMM applied by the assessee and instead, applied Other Method for the purpose of benchmarking analysis. For applying the Other Method, the TPO selected 7 uncontrolled agreements and held that median rate of commission charged / paid under the said agreements represents the arm’s length price for the marketing support services provided by the assessee.
4. The TPO, thereafter, applied the said commission rate on the sales made by the associated enterprises in India and arrived at the arm’s length compensation for the services provided by the assessee to the associated enterprises. Accordingly, transfer pricing adjustment was made by the TPO in respect of the international transaction of provision of marketing support services.
Hon Delhi HC held as below:
1. Even though the principle of res judicata does not strictly apply to tax matters, inconsistencies in the approach in assessment of tax on annual basis, would be debilitating to a conducive commercial environment.
2. A change in the approach of assessment of tax, absent any statutory change, leads to uncertainty as to the cash flow/fund flow, which are the lifelines of commercial enterprises. Thus, unless there are cogent reasons to discard the method for transfer pricing adopted in the earlier assessment years, the TPO was required to follow the method consistently adopted for determining the ALP in prior years.
The copy of the order is as under:
