2018 (1) TMI 1411 - AT - Income Tax

TPA - determination of ALP of international transaction - MAM selection - CPM OR TNMM - retrospective amendment to the second proviso to section 92C (2) by the Finance Act 2012 - Held that - As decided in assessee s own case 2014 (3) TMI 619 - ITAT DELHI directing TPO to exclude domestic transaction in computation while computing adjustment based on ALP of international transaction was upheld . So we are of the considered view that for transfer pricing adjustment only international transactions are to be considered. Since there is no change of facts on this point qua the year under assessment TPO is directed to exclude domestic transaction in computing adjustment based on ALP of international transaction. TPO while computing the ALP of international transaction has taken average OP/TC at Profit Level Indicator (PLI) at 14.24% which is factually incorrect because as per working of comparable companies net margin given by the taxpayer available at page 194 of the paper book is 11.51%. Without disputing the working of the comparable companies and net margin given by the taxpayer the ld. TPO has wrongly given the average at 14.24% which is incorrect. So TPO is directed to adopt the correct average PLI as per working available at page 194 of the paper book. TPO was required to consider the segmental account to determine the ALP of the international transaction. Taxpayer is directed to again place on record segmental accounts with identifiable cost in profit and loss account of the taxpayer to be examined by the ld. TPO. Denying the benefit of /- 5% by applying the TNMM under Second Proviso to section 92C (2) Tolerance margin in the instance case is to be determined after making correct computation by the TPO as discussed in the preceding paras. We are of the considered view that in case variation between the ALP as determined u/s 92C (1) and the price at which the international transaction has actually been undertaken exceeds the tolerance margin then the taxpayer is not entitled for benefit of /- 5%. This exercise is to be carried out by the TPO after correct computation by the TPO in the light of the decision rendered by the Special Bench of the Tribunal in IHG IT Services (India) (P.) Ltd. 2013 (5) TMI 309 - ITAT DELHI . In view of what has been discussed above impugned order passed by the ld. DRP/TPO/AO is set aside and the TPO is directed to decide afresh after providing an opportunity of being heard to the taxpayer in view the directions issued herein before. Appeal filed by the assessee is allowed for statistical purposes - Appeal filed by the assessee is allowed for statistical purposes

Summary

Issues Involved:
1. Addition to Arm's Length Price (ALP) of representation services segment.
2. Consideration of domestic transactions as international transactions.
3. Adoption of Transactional Net Margin Method (TNMM) over Cost Plus Method (CPM).
4. Rejection of segmental accounts.
5. Denial of benefit of +/- 5% tolerance margin.

Detailed Analysis:

1. Addition to Arm's Length Price (ALP) of Representation Services Segment:
The taxpayer contested the addition of Rs. 4,195,482 to the ALP of the representation services segment. The Transfer Pricing Officer (TPO) rejected the taxpayer's Cost Plus Method (CPM) for determining the ALP and instead used the Transactional Net Margin Method (TNMM). The TPO based the ALP on the profitability at the entity level and computed the average OP/TC of three comparables, resulting in an adjustment of Rs. 4,195,482. The Dispute Resolution Panel (DRP) upheld the TPO's determination.

2. Consideration of Domestic Transactions as International Transactions:
The TPO included domestic transactions in the computation of the ALP. However, it was established that transfer pricing adjustments should only consider international transactions. The Tribunal directed the TPO to exclude domestic transactions when computing the ALP of international transactions, referencing the taxpayer's own case for AY 2005-06.

3. Adoption of Transactional Net Margin Method (TNMM) Over Cost Plus Method (CPM):
The taxpayer argued that the TPO erred in adopting TNMM instead of CPM. The TPO justified the rejection of CPM by stating that the segmental accounts were manipulated and unreliable. The Tribunal noted that the TPO had not demanded segmental accounts during the original proceedings and directed the taxpayer to submit segmental accounts with identifiable costs for re-examination.

4. Rejection of Segmental Accounts:
The TPO rejected the segmental accounts submitted by the taxpayer, alleging manipulation. The Tribunal observed that the TPO did not point out specific discrepancies in the segmental accounts and directed the taxpayer to resubmit the segmental accounts with identifiable costs for the TPO's examination.

5. Denial of Benefit of +/- 5% Tolerance Margin:
The taxpayer claimed the benefit of the +/- 5% tolerance margin as per the second proviso to section 92C(2). The Tribunal referred to the Special Bench decision in IHG IT Services (India) (P.) Ltd., which clarified that the tolerance margin benefit is only available if the variation between the ALP and the transaction price does not exceed the tolerance margin. The Tribunal directed the TPO to re-compute the ALP and determine if the taxpayer is entitled to the tolerance margin benefit.

Conclusion:
The Tribunal set aside the impugned order and directed the TPO to re-examine the ALP determination, excluding domestic transactions, adopting the correct average PLI, and considering the segmental accounts with identifiable costs. The TPO was also instructed to re-evaluate the entitlement to the +/- 5% tolerance margin after correct computation. The appeal was allowed for statistical purposes, and the taxpayer was to be given an opportunity to be heard.