Judgment summary
This is an appeal by the Pr. Commissioner of Income Tax-7 under Section 260A of the Income Tax Act, 1961, against a Tribunal order dated 08.06.2021 in ITA No. 454/Del/2021, which had allowed the appeal of Sabic India Pvt Ltd against an assessment order dated 31.03.2021 for AY 2016-17 (1).
The dispute concerned a transfer pricing adjustment of ₹3,61,32,20,620/- made by the Transfer Pricing Officer (TPO) after rejecting the assessee's TNMM-based benchmarking and adopting the "other method" under Rule 10B(1)(f) of the Income Tax Rules, 1962 (2, 4).
The Tribunal had found that the TPO gave no reasons for rejecting TNMM and had not justified discarding the other five methods before adopting the "other method" (17, 18). The High Court concurred with the Tribunal and dismissed the Revenue's appeal, holding that no substantial question of law arose (40, 41).
Background
The assessee, Sabic India Pvt Ltd, is part of the SABIC Group, whose holding company Saudi Basic Industries Corporation (SABIC) is a public company based in Riyadh, Saudi Arabia, listed on the Saudi Arabia Stock Exchange since 1984 (5). The assessee was incorporated on 15.06.1992 as a wholly foreign-owned enterprise, with shares held by Sabic Global Limited, UK (51%) and Sabic Asia Pacific Pte Ltd, Singapore (49%), as at 31.03.2016 (6).
The assessee provides marketing support services to facilitate the SABIC Group's sale of fertilizers, chemicals and polymers in India and the Indian sub-continent (Nepal, Maldives, Bhutan, Sri Lanka and Bangladesh). It does not contract with customers or trade in the products supplied by its Associated Enterprises (AEs), and receives commission income for its support services (7).
For the year relevant to AY 2016-17, the assessee received ₹87,92,14,730/- for marketing support services and paid ₹14,75,826/- for training and SAP related expenses, both treated as international transactions (8, 9). The assessee filed its return of income on 25.11.2016 declaring total income of ₹77,82,14,150/- (3).
The assessee had used TNMM as the most appropriate method, applying OP/VAE and GP/VAE as profit level indicators (PLIs), and this method had been consistently followed for AYs 2009-10 to 2014-15 (10, 17).
Core dispute
The core dispute was whether the TPO was correct to reject TNMM as the most appropriate method for benchmarking the assessee's international transactions and to instead adopt the "other method" under Rule 10B(1)(f) read with Rule 10AB of the Income Tax Rules, 1962 (4, 14, 31).
The TPO had determined a median commission rate of 5% using a set of seven comparable agreements and computed an upward adjustment of ₹3,61,32,20,620/- under Section 92CA of the Act (14, 15). The DRP upheld the rejection of TNMM but excluded two of the TPO's comparables (16).
The Revenue framed several questions for the High Court, including whether the Tribunal was correct in treating TNMM as the most appropriate method, in rejecting the TPO's comparability analysis and use of the "other method", and whether the Tribunal's order was a non-speaking order suffering from perversity (24).
Court findings
The Court held that TNMM had been consistently followed for determining adjustments under Section 92CA for AYs 2009-10 to 2014-15, and that it could not be rejected by the TPO without substantial reason (26).
Referring to M/s Radhasoami Satsang v. Commissioner of Income Tax, the Court noted that although res judicata does not strictly apply to income tax proceedings, consistency in approach across assessment years is important for a conducive commercial environment, and cogent reasons are required to depart from a method consistently adopted in earlier years (27, 28).
A plain reading of the TPO's order dated 29.10.2019 showed that the TPO had provided no reason for rejecting TNMM, and had only criticised the assessee's selection of comparables, which the Court held afforded no grounds for rejecting TNMM itself (29, 30).
The Court further held that recourse to the "other method" under Rule 10B(1)(f) and Rule 10AB is available only where none of the other methods are considered most appropriate, and that the TPO had not discussed the applicability of the other methods before adopting it (31, 33).
The Court also found that several comparables used by the TPO and accepted by the DRP were not similar to the international transactions being benchmarked, including a Non-Compete Agreement and an agreement relating to educational services, and that Revenue's counsel could not explain the similarity when asked by the Court (35, 38).
Outcome
The High Court concurred with the Tribunal's findings that the TPO had rejected TNMM without reasons and had improperly adopted the "other method" without justifying the discarding of the other five methods (30, 31).
The Court held that no substantial question of law arose in the appeal (40).
The appeal was dismissed, and the pending application (CM APPL. 59663/2024) was also disposed of (41).
Tp method highlighted
The assessee applied the transactional net margin method (TNMM), using Operating Profit/Value Added Expenses (OP/VAE) and Gross Profit/Value Added Expenses (GP/VAE), the latter being a form of Berry ratio, as profit level indicators (10, 20).
The TPO rejected TNMM and instead applied the "other method" under Rule 10B(1)(f) of the Income Tax Rules, 1962, as elaborated under Rule 10AB, describing it as not a CUP method but "somewhat akin" to CUP with wider latitude (4, 14).
Using a search of an available database, the TPO identified seven comparable agreements and computed a median commission rate of 5%, compared to the assessee's actual commission income, to arrive at the adjustment (14, 15).
The Court held that Rule 10AB requires the benchmarked transactions to be the same or similar to the comparables used, and found that several of the TPO's chosen comparables (such as a Non-Compete Agreement and an agreement for educational services) were not similar to the assessee's marketing support services (36, 38).
Major issues / areas of contention
- Whether the Tribunal correctly held TNMM to be the most appropriate method for benchmarking the assessee's international transactions
- Whether the TPO provided adequate reasons for rejecting TNMM as the most appropriate method
- Whether the TPO was required to justify discarding all other five methods under Rule 10B(1) before adopting the 'other method' under Rule 10B(1)(f)/Rule 10AB
- Whether the comparable agreements selected by the TPO and partly accepted by the DRP were genuinely comparable to the assessee's marketing support services
- Whether consistency in the transfer pricing method followed in earlier assessment years (2009-10 to 2014-15) should be maintained absent cogent reasons to depart
- Whether the Tribunal's order was a non-speaking order or suffered from perversity, as alleged by the Revenue