Withdrawal of Upward Adjustments of Income proposed by TPO: Delhi HC applies Rule of Consistency to adopt TNMM [Read Order]

In a recent decision the Delhi High Court applied the rule of consistency to adopt Transactional Net Margin Method ( TNMM ) in the matter regarding withdrawal of upward adjustments of income proposed by Transfer Pricing Officer ( TPO ).

The assessee is wholly owned subsidiary of Oriflame International SA and is engaged in the business of sale of a wide variety of skin care and cosmetic products. As a part of its business operations, the respondent undertook international transactions with its associated enterprises [“AEs”]. The said transactions for the assessment years [“AYs”] 2009-10, 2010-11, 2011-12 and 2012-13 were referred to the TPO under Section 92CA of the Income Tax Act for determination of the arm’s length price [“ALP”].

The TPO rejected the comparable entities as selected by the respondent and selected Modicare as the comparable entity after considering databases, annual reports and other relevant material and proposed an upward adjustment of the income of the respondent. Consequently, assessment orders were passed by the Department for the said AYs reflecting the upward adjustments as proposed by the TPO. 

The Income Tax Appellate Tribunal ( ITAT ) remanded the matter back to the TPO and directed it to look into the claim of adjustments as required to be made to Modicare in order to enhance its comparability with that of the respondent.

The ITAT ultimately held that Modicare cannot be considered as a comparable entity under the RPM method. The ITAT also held that the Transactional Net Margin Method [“TNMM”] ought to be adopted as the most appropriate method for benchmarking the respondent’s case. It is against these findings of the ITAT that the Department has filed the instant appeals before the Delhi High Court.

A Division Bench of Justices Yashwant Varma and Purushaindra Kumar Kaurav observed that “During the course of hearing today, it was brought to our attention that the matter has been resolved inter partes in terms of the assessment which came to be finalised for AY 2014-15 and that Modicare Limited has been excluded from the list of comparables to determine the ALP and the upward adjustments of income as proposed by the Department has not been undertaken as well. We are informed that the view taken therein has been duly accepted and followed in the subsequent years.”

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