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2015 (12) TMI 1410 - AT - Income TaxTransfer pricing adjustment - whether the PSM is the appropriate method as adopted by the assessee or TNMM method as adopted by the AO? - Held that - In the present case, we have to see as to whether the PSM is the appropriate method as adopted by the assessee or TNMM method as adopted by the AO. In the present case, the different activities performed by the Infogain India i.e. assessee and Infogain US are inextricably linked and both the entities are contributing significantly to the value chain of provision of software services to the end customers. In the instant case Global Delivery Organization Group (GDO) in India is responsible for delivery of services to the customers globally. The primary objective of the group is to bring synergies amongst geographic groups and project, to make efficient use of the available resources, to broaden areas of service offerings, to improve opportunity fulfillment ration, and to maximize customer satisfaction with each project execution. However, the TPO had not considered the role of the GDO. In the present case, the TPO mentioned that the shifts in the assessee s case started from 2005 onwards, however, the assessee chose to change the method in the financial year under consideration, the explanation of the assessee was that though the transition process started from September 2005 which was very gradual and led to the complete shift in the functional matrix of Infogain Group over a period of 2-3 years, therefore, the pricing model was changed w.e.f April 2007, the said explanation appears to be a plausible. In the instant case, the assessee assigned weights to each activity keeping in view the relative importance in the entire value chain, based on interviews with the key management personnel and the functions in the value chain of software services provided by the Infogain Group to the customers based in the US were identified and weights were assigned to the functions having regard to their relative importance in the value chain, which is evident from page nos. 229 to 234 of the assessee s paper book wherein the functions are clearly designed in a tabular form. In the present case, both the parties i.e. Infogain India (assessee) and Infogain US are making contribution. Therefore, the Profit Split Method is the most appropriate method for determination of ALP. Therefore, we are of the view that the conclusion of the TPO that the PSM is adopted by the assessee only to camouflage loss at the net level is merely an allegation and hence devoid of merit. In the present case, the assessee adopted Profit Split Method, for application of the said method, the provisions are contained in Rule 10B(1)(d) of the Income Tax Rules, 1962. According to the said provisions the Profit Split Method is applicable mainly in international transactions which are so interrelated that they cannot be evaluated separately, for the purpose of determining the arms length price. How the allocation is to be done for residuary profits? - Held that - It is well settled that as per the Rule 10D, the benchmarking should be done with the external uncontrolled transactions, however, in the present case, it is not possible to get a comparable. Therefore, such allocation can be done on the basis that how much each independent enterprise might have contributed. Therefore, relative contribution has to be determined, based on key value drivers because benchmarking is not practicable. In the present case, as the comparables having similar transactions would be difficult to find out, therefore, in such a situation, a harmonious interpretation of the provisions is required to make the rule workable, so as to achieve the desired result of the determination of the ALP. Both the OECD Transfer Pricing Guidelines as well as the UN draft method of transfer pricing for developing countries, suggest that an allocation of residual profits under PSM should be done, based on contributions by each entity. In the present case, since the department has accepted in the preceding year and the succeeding year 40 60 ratio between the Infogain India and Infogain US and if the facts are similar for the year under consideration then no deviation is to be done. We, therefore, set aside the issue to file of the AO/TPO to decide the issue following the clear directions given in former part of this order as well as by the Coordinate Bench in the aforesaid referred to orders and after providing due and reasonable opportunity of being heard to the assessee.
Issues Involved:
1. Transfer Pricing Adjustment. 2. Comparability Analysis and Profit Split Method. 3. Use of Data and Risk Adjustments. 4. Application of Transactional Net Margin Method (TNMM). 5. General Grievances Regarding the Assessment. Detailed Analysis: 1. Transfer Pricing Adjustment: The core issue in the appeal was the addition of Rs. 145,259,630/- made by the AO on account of transfer pricing adjustment. The assessee contested this addition, arguing that it was not in accordance with the law and thus not sustainable. 2. Comparability Analysis and Profit Split Method: The assessee argued that the Dispute Resolution Panel (DRP) erred in rejecting the comparability analysis without demonstrating any inadequacy in the economic analysis conducted by the assessee. The DRP disregarded the profit split percentage embedded in the Transfer Pricing Documentation, alleging that the arrangement was subjective and not based on empirical data. The assessee had adopted the Profit Split Method (PSM) due to a significant change in its functional matrix, with Infogain India assuming critical delivery functions. The DRP, however, rejected this method, favoring the Transactional Net Margin Method (TNMM) instead. 3. Use of Data and Risk Adjustments: The DRP supported the TPO's use of data obtained under Section 133(6) of the Act, which was not available to the assessee at the time of maintaining Transfer Pricing Documentation. The DRP also rejected the assessee's claim for risk adjustments, stating that the assessee had not shown how these adjustments would improve comparability. The DRP emphasized that mere pointing out of various risks without evidence of their actual impact on comparables was insufficient. 4. Application of Transactional Net Margin Method (TNMM): The DRP and TPO favored the TNMM over the PSM, arguing that the latter was not demonstrated properly by the assessee. The TPO contended that the assessee's shift to PSM was due to incurred losses, a claim the assessee refuted by explaining the gradual transition in its functional matrix. The DRP upheld the use of single-year data for determining the Arm's Length Price, rejecting the assessee's preference for multiple-year data. 5. General Grievances Regarding the Assessment: The assessee raised several general grievances, including the excessive and unjust nature of the addition/adjustment, the improper consideration of evidence and explanations provided, and the failure to allow appropriate comparability adjustments. The DRP's reliance on selective information and the rejection of the benefit of (+/-)5% as provided in the proviso to Section 92C(2) of the Act were also contested. Conclusion: The Tribunal concluded that the Profit Split Method (PSM) was the most appropriate method for determining the Arm's Length Price, given the inextricably linked and interrelated functions of Infogain India and Infogain US. The Tribunal noted that the TPO's conclusion about the assessee's shift to PSM due to losses was unsubstantiated. The Tribunal also highlighted that the same method had been accepted in preceding and succeeding years. Consequently, the Tribunal set aside the issue to the file of the AO/TPO to decide following the directions provided, allowing the appeal of the assessee for statistical purposes.
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