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India - Decision of the High Court of Delhi (India) in Principal Commissioner of Income-tax v. Hellmann Worldwide Logistics India, [2023] 155 taxmann.com 44

Dated 04 October, 2023

In an appeal by the tax department against a decision by the Income Tax Appellate Tribunal (ITAT) regarding the assessment year 2008-09, the issue revolved around the correct method to determine the "arm’s length price". The main legal question was regarding the methods used for transfer pricing – whether the ITAT was right in its direction regarding the use of internal Transactional Net Margin Method (TNMM) for calculating the arm’s length price, especially when the assessee (the company) did not originally use this method nor was it the method preferred by the tax department.


The taxpayer is a Private Limited Company involved in airfreight and sea freight. For the given assessment year, the company declared a particular income. During the assessment, the Transfer Pricing Officer (TPO) was involved to evaluate the international transactions of the taxpayer. The TPO rejected the method (CUP) used by the taxpayer to determine the arm’s length price and suggested another method (external TNMM). A draft assessment was created, which increased the taxpayer's taxable income. This was contested by the taxpayer, resulting in a revised calculation. Dissatisfied with the decision, the taxpayer appealed to the ITAT. The ITAT directed the taxpayer to perform an internal FAR and determine the most appropriate method for transfer pricing. Post the ITAT's decision, the case was reassessed and the assessee used internal TNMM method, which was once again rejected by the TPO.


The matter once again reached the ITAT in appeal. The ITAT allowed the internal TNMM method despite the tax department contesting that there was no record of the internal FAR performed by the Company. Consequently, the matter reached the High Court in an appeal filed by the tax department. The tax department's primary contention is that the ITAT had no right to direct a change in the method since neither the taxpayer nor the Assessing Officer originally considered that method. Whereas, the taxpayer argued that since the ITAT's decision was already implemented, there's nothing left to dispute. They further argued that internal TNMM was the most appropriate method, irrespective of the taxpayer's initial choice.

The court took note of the ITAT's reasoning and found it robust. It emphasized that the ultimate aim is to determine an accurate value of the arms length price, irrespective of the initial choice of method.

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