ITAT upholds TNMM Method Over CUP for Benchmarking Export Transactions under Manufacturing Segment [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) upheld Transactional Net Margin Method ( TNMM ) over Central Processing Unit ( CPU ) benchmarking export transactions under manufacturing segment 

The LANXESS India Private Limited was a company engaged in the business of manufacture and trading of chemical and chemical intermediates. The assessee is a subsidiary of Lanxess Deutschland GmbH. The TPO after analyzing the transactions under manufacturing segment reject assessee’s method i.e. TNMM and applied CUP to benchmark the export transactions of the assessee with AEs and made adjustment of Rs.2, 38, 66,092/-.

The assessee bench marked its transactions applying TNMM as the most appropriate method. The TPO rejected the same and applied “Other Method ” i.e.Need- Evidence – Benefit Test”. The TPO after examining IT Services Agreement and the submissions of the assessee came to the conclusion that the assessee has not been able to establish the functions performed, assets deployed and the risk assumed by the AE in providing the services. He held that the assessee has not provided quantification of services in terms of actual expenditure incurred by AE and commensurate benefit therefrom to the assessee and thus, held cost of intra group services as Nil.

The assessee filed objections before the Dispute Resolution Panel ( DRP ). The DRP vide directions dated 21/09/2018 rejected objections in respect of the manufacturing segment in toto. In so far as intra group services, the DRP concluded that the action of the TPO was not proper in respect of all IT Services except the Regional (AP) Cost

Mr. Dhanesh Bafna representing the assessee submitted that the TPO has made adjustment in relation to export of goods (manufacturing segment) by applying CUP instead of TNMM adopted by the assessee for benchmarking the transactions. He submitted that the manner and the reasons given by the TPO for making the adjustment under manufacturing segments are identical to Assessment Year 2010-11. The assessee carried the issue in appeal before the Tribunal in ITA NO.971/Mum/2015

 the two member bench of the tribunal comprising S. Rifafur Rahman ( Accountant member) and Vikas Awasthy ( Judicial member) observed that CUP was not the most appropriate method for benchmarking the transaction for export of goods under manufacturing segment and upheld the assessee’s method of benchmarking i.e. TNMM was the most appropriate method.

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