2014 (2) TMI 1222 - AT - Income Tax

Transfer Pricing adjustment - Retention of Zenith Infotech Ltd. as comparable company - Not granting an opportunity to the assessee with regard to acceptability of additional comparables and Internal TNMM - Held that - Having heard the rival submissions and perused the orders of the lower authorities and the relevant material evidence brought on record in the light of the Rule 18(6) of the Income Tax Appellate Tribunal Rules 1963, in our understanding of law, internal TNMM should get precedence over the external TNMM comparables. In the interest of justice and fair play, we restore this issue back to the files of the TPO. The TPO is directed to consider the internal comparable TNMM. The assessee is directed to provide necessary details to the TPO. Being fair to both parties, we allow the assessee to bring forth additional comparables and direct the TPO to accept/reject the same after necessary examination/verification as per the provisions of law. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Retention of Zenith Infotech Ltd. as a Comparable Company
3. Inclusion of Additional Comparables and Internal TNMM

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around the confirmation of an unjustified Transfer Pricing adjustment amounting to Rs. 6,08,81,192 by the Additional Director of Income-tax (International Taxation - Range 1) and Additional Commissioner of Income-tax (Transfer Pricing) - 1(2). The assessee had engaged in international transactions with associated enterprises (AEs) involving telecom services and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The Transfer Pricing Officer (TPO) computed the Arm's Length Price (ALP) leading to an upward adjustment.

2. Retention of Zenith Infotech Ltd. as a Comparable Company:
The assessee contested the retention of Zenith Infotech Ltd. as a comparable company, arguing that it was not functionally comparable and had high abnormal margins. Despite these contentions, the CIT(A) upheld the TPO's decision to retain Zenith Infotech Ltd. The TPO had rejected the inclusion of additional comparables proposed by the assessee, stating that the assessee had not provided sufficient reasoning or search strategy for their inclusion and had not explained why these comparables were not considered in the original TP study.

3. Inclusion of Additional Comparables and Internal TNMM:
The assessee sought to include additional comparables such as GTL Ltd., ORG Informatics Ltd., and Wireless T.T. Info Services Ltd., which the TPO rejected. The CIT(A) also rejected the claim for inclusion of additional comparables, stating that it was beyond the grounds of appeal. The assessee argued that internal TNMM should be preferred over external comparables, citing the decision of the Mumbai Tribunal in the case of Technimont Icb India (P) Ltd. 138 ITD 23, which supports the precedence of internal comparables over external ones due to higher comparability.

Tribunal's Findings:
The Tribunal noted that internal TNMM should get precedence over external TNMM comparables, supported by various decisions, including Technimont Icb India (P) Ltd. The Tribunal restored the issue back to the TPO, directing the TPO to consider internal comparable TNMM and allow the assessee to provide necessary details. The Tribunal also allowed the assessee to bring forth additional comparables, directing the TPO to accept or reject them after necessary examination and verification as per the provisions of law, ensuring reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, with the Tribunal emphasizing the importance of internal comparables and directing a re-examination of the additional comparables proposed by the assessee. The Tribunal's decision ensures a fair and just approach in determining the ALP of international transactions.