2018 (4) TMI 1635 - AT - Income Tax

TPA - MAM selection - assessee had applied TNMM method while taking foreign entity as tested party and had compared the margins of assessee with mean margins of selected comparables - international transaction - determination of arm s length price of transactions pertaining to payment of fees for advisory and other services by the assessee to its associated enterprises - Held that - As decided in assessee s own case 2017 (12) TMI 1568 - ITAT PUNE Tribunal held that TNMM method was the most appropriate method to be applied to benchmark international transactions undertaken by the assessee by taking foreign associated enterprises as tested party and further, the Tribunal held that the said transaction of fees paid for advisory and other services was to be benchmarked by comparing the margins of tested party i.e. foreign associated enterprises with margins of external comparables selected by the assessee, who were also engaged in providing similar advisory and related services to its entities. However, for the limited purpose of verification that the margins shown by tested party i.e. foreign associated enterprise was at arm s length price of margins shown by comparables selected by the assessee, the matter was remitted back to the file of Assessing Officer / TPO for verification. The issue which arose in earlier year and since the international transactions undertaken by the assessee were identical to the international transactions undertaken in earlier years, hence following the same parity of reasoning, we hold that TNMM method was the most appropriate method to be applied to benchmark arm s length price of international transactions of fees paid for advisory and other services by taking foreign associated enterprise as tested party. AO is directed to benchmark the transactions by taking margins of foreign comparables which were selected by the assessee in earlier year and even in the year under consideration. However, to verify the claim of assessee that the margins shown by assessee and the mean margins shown by the comparables were within /- 5% range, the Assessing Officer is directed to comply with the directions of Tribunal as in earlier year and compute arm s length price of international transactions. Adjustment made on account of international transactions pertaining to payment of fees for advisory and other services by the assessee to its associated enterprises - upward adjustment was made in the hands of assessee - Held that - Referring to ITES segment of assessee companies functionally dissimilar with that of assessee need to be deselected from final list. Also in case the employee cost to sales ratio was less than 25%, then the concerns have to be excluded from final set of comparables.

Issues Involved:
1. Transfer Pricing (TP) Adjustment
2. Determination of Arm's Length Price (ALP)
3. Application of Comparable Uncontrolled Price (CUP) Method
4. Initiation of Penalty Proceedings under Section 271(1)(c)
5. Benchmarking of International Transactions
6. Inclusion/Exclusion of Comparable Companies
7. Verification of Employee Cost Filter

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:
The primary issue involves the confirmation of an addition of ?10,85,12,147 to the total income of the appellant due to TP adjustment under Section 92CA(3) of the Income-tax Act, 1961. The appellant argued that the TP analysis conducted should be accepted and the adjustment deleted. The Tribunal noted that the TP adjustments were made by the Assessing Officer (AO) / Dispute Resolution Panel (DRP) / Transfer Pricing Officer (TPO) by determining the transaction at Nil instead of ?10,85,12,147 as declared by the assessee.

2. Determination of Arm's Length Price (ALP):
The appellant contested the determination of the ALP for the payment of fees for advisory and other services to its associated enterprises (AEs) as Nil, leading to the TP adjustment. The Tribunal found that the issue was whether any services were provided by AEs to justify the payment and the appropriate method to benchmark these transactions. The Tribunal referred to its earlier decision, holding that the Transactional Net Margin Method (TNMM) was the most appropriate method, and directed the AO/TPO to verify the margins of comparables.

3. Application of Comparable Uncontrolled Price (CUP) Method:
The appellant argued against the application of the CUP method by the DRP and AO without identifying valid comparable uncontrolled transactions. The Tribunal reiterated its stance from earlier cases, emphasizing the use of TNMM over CUP for benchmarking the transactions.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c), arguing that the addition sustained was a difference of opinion rather than any omission or misrepresentation of facts. The Tribunal's decision on this matter was not explicitly detailed in the provided text.

5. Benchmarking of International Transactions:
The Tribunal directed that the TNMM method should be used to benchmark the international transactions, taking foreign AEs as the tested party. The AO was instructed to compare the margins of the foreign AEs with those of external comparables engaged in similar advisory and related services.

6. Inclusion/Exclusion of Comparable Companies:
In the assessment year 2012-13, the appellant raised issues regarding the inclusion of certain comparables, such as Excel Infoways Ltd. and Universal Print Systems Ltd., which were claimed to have low employee cost ratios. The Tribunal directed the AO to verify these claims and exclude the companies if their employee cost to sales ratio was less than 25%.

7. Verification of Employee Cost Filter:
The Tribunal noted that in the ITES segment, high employee cost is a crucial factor. It directed the AO to verify the employee cost to sales ratio of the comparables and exclude those with a ratio below 25%, ensuring that only functionally comparable companies are selected.

Conclusion:
The Tribunal allowed the appeals of the assessee for both assessment years, directing the AO/TPO to follow the TNMM method for benchmarking and to verify the comparables' margins and employee cost ratios. The Stay Applications filed by the assessee were dismissed as infructuous. The Tribunal emphasized providing a reasonable opportunity of hearing to the assessee during the verification process.

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