In a recent ruling, the Delhi High Court upheld the use of the Transactional Net Margin Method ( TNMM ) as the appropriate approach for calculating the arm’s length price ( ALP ) over the alternative “other method” suggested by Transfer Pricing Officer ( TPO ) in a transfer pricing dispute involving substantial adjustments.
The case involved an upward adjustment of ₹361.32 crore to the assessee’s declared income, with the TPO claiming that TNMM was unsuitable for evaluating the assessee-taxpayer’s international transactions with its associated enterprises ( AEs ).
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The case originated when the assessee, Sabic India Pvt Ltd, an Indian subsidiary of a global corporation, filed its income tax return for the assessment year 2016-17. The assessee’s international transactions, primarily involving marketing support services for its foreign parent company and affiliates, were evaluated using TNMM. According to this method, the assessee calculated the ALP by comparing its profit margins with those of comparable independent entities.
However, the TPO rejected TNMM, asserting that it was not appropriate for the assessee’s unique operational profile as a commission agent for its AEs. The TPO instead adopted the “ Any Other Method” under Rule 10B(1)(f) of the Income Tax Rules, 1962, relying on a customized Comparable Uncontrolled Price ( CUP ) approach. This method used a median commission rate of 5% derived from comparables, resulting in the substantial adjustment to the taxpayer’s income.
The assessee, aggrieved by the adjustment, appealed the TPO’s decision before the Dispute Resolution Panel ( DRP ), arguing that the TPO had failed to provide adequate reasons for rejecting TNMM. It was contended that TNMM had been consistently accepted as the most suitable method in its previous assessments from 2009-10 to 2014-15. Despite these arguments, the DRP upheld the TPO’s approach, finding no reason to challenge the use of the alternative method.
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Aggrieved again, the assessee took the matter to the ITAT, arguing that the TPO’s rejection of TNMM was arbitrary and lacked a substantive basis. The assessee further contended that the TPO’s reliance on CUP was flawed, as it involved comparables that did not align with the taxpayer’s specific operational profile or its marketing support services.
Upon reviewing the case, the ITAT ruled in the taxpayer’s favor, observing that the TPO had not provided valid reasons for dismissing TNMM. The tribunal noted that any deviation from an established transfer pricing method—particularly TNMM, which had been used consistently in prior assessments—must be supported by substantial evidence and reasoning. In this case, the ITAT found the TPO’s decision to adopt the “Other Method” unjustified and inconsistent with earlier assessments. It was noted that TNMM, widely accepted for marketing support services, remained the most appropriate method for the taxpayer’s operations and rejected the TPO’s selected comparables, which included transactions unrelated to the taxpayer’s business model.
The Revenue subsequently appealed to the Delhi High Court, contesting the ITAT’s preference for TNMM and supporting the TPO’s alternative approach.
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The Revenue argued that the TPO had provided sufficient grounds for adopting an alternative method, given the lack of suitable comparables for the assessee’s international transactions. The Revenue further contended that the ITAT had erred in dismissing the TPO’s comparables, which included rates from industries the TPO considered similar, despite those comparables involving distinct business models such as non-compete agreements and technical assistance services.
In its judgment, the bench of Justice Vibhu Bakhru and Justice Swarana Kant Sharma sided with ITAT, upholding the importance of maintaining consistency in transfer pricing methodology unless strong reasons suggest otherwise. The court referenced previous Supreme Court rulings, highlighting that stability in tax assessments is essential for cultivating a predictable commercial environment.
The court criticized the TPO’s decision to discard TNMM without sufficient justification, noting that abrupt changes to transfer pricing methodology could disrupt corporate financial planning. It further found that the TPO had failed to provide reasons for adopting the “Other Method,” particularly since TNMM had been accepted in previous assessments and there had been no substantial change in the taxpayer’s business model that would warrant a shift in approach.
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The court also addressed the Revenue’s reliance on comparables, which the ITAT had found misaligned with the taxpayer’s specific services. The High Court observed that the selected comparables—drawn from unrelated sectors, such as educational and chemical services—did not accurately reflect the nature of the assessee’s marketing support role. The court noted that in cases involving commission-based transactions, methods like CUP require precisely matched comparables to ensure accuracy. Here, the TPO’s reliance on data from disparate sectors created unnecessary discrepancies.
In result, the Revenue’s appeal was dismissed, with ITAT’s ruling upheld.
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