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2019 (5) TMI 1832 - AT - Income TaxTP Adjustment - upward transfer pricing adjustment on the services rendered to its AE - assessee benchmarked its international transaction with AE by applying internal CUP method - assessee alternatively in its TP study report has also benchmarked the transactions by taking internal TNMM method where operating profit to operating cost was taken as PLI - TPO was of the view that the internal comparable selected by the assessee is not appropriate and reasonable accurate adjustment also cannot be made in the available facts and circumstances - TPO rejected the internal CUP and internal TNMM as most appropriate method - HELD THAT - As relying on assessee's own case 2018 (1) TMI 1613 - ITAT AHMEDABAD assessee rightly benchmarked the transaction by choosing the internal CUP method as most appropriate method and alternatively also rightly benchmarked the internal TNMM method as most appropriate method to determine the ALP. Accordingly, the appeal of the assessee is allowed. Alternate ground of appeal raised by the assessee for taking the external TNMM - TPO rejected the internal CUP and internal TNMM method selected by the assessee - TPO selected 8 companies as comparables - HELD THAT - Cross Domain Solution Pvt Ltd is engaged in KPO services. Therefore the same is not a fit comparable in the given facts circumstances. Hence we direct the TPO to exclude this company as comparable. R systems International Ltd - Comparable has been identified after the documentation of TP study, therefore, the exercise is post facto analysis - assessee before TPO also submitted that the AMP expenditure also includes some expenses such as marketing salary, marketing travel, commission on sales and advertising sales promotion which are not in AMP nature. However ld. TPO failed to give any findings on it. The ld. DR also did not argue in this regard before us, therefore, we are assuming it to be in the nature of selling expenses and not in the nature of AMP expenses. Accordingly, we are of the opinion this comparable should be taken in to account while benchmarking the transaction. CG-Vak Software and exports Ltd - Its turnover is less than ₹ 1 Crores and its margin had been fluctuating during the past and subsequent years - As decided in own case 2018 (1) TMI 1613 - ITAT AHMEDABAD the turnover of the relevant segment of the company is 86.10 lacs but just because this company does not pass the turnover filter of 1 crore should not have been rejected as the business is exactly similar to that of the appellant company. Respectfully following the same we also direct the TPO to consider this companies as discussed above as comparable. Hence the ground of appeal of the assessee is allowed.
Issues Involved:
1. Transfer Pricing Adjustment of ?1,67,98,967. 2. Levying of Consequential Interest under Section 234B and 234D of the Act. 3. Levy of Penalty under Section 271(1)(c) of the Act. Detailed Analysis: 1. Transfer Pricing Adjustment of ?1,67,98,967: The primary issue raised by the assessee pertains to the upward transfer pricing adjustment made by the CIT(A) on the services rendered to its Associated Enterprise (AE). The assessee had entered into international transactions with its AE, Etech Inc., located in the USA, providing call center services and charging fees. The assessee benchmarked its international transactions using the Internal Comparable Uncontrolled Price (CUP) method and alternatively the Internal Transaction Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) rejected the internal CUP method, citing differences in the pricing mechanism and nature of services provided to AE and non-AE clients. The TPO also rejected the internal TNMM method, arguing that the risk profiles and turnover between AE and non-AE segments were not comparable. Consequently, the TPO applied the External TNMM method, selecting eight comparable companies and rejecting the ones suggested by the assessee. The CIT(A) upheld the TPO's decision, stating that the services provided under both agreements were different and that a high level of comparability was required under the CUP method. The CIT(A) also dismissed the internal TNMM method due to significant differences in turnover between the AE and non-AE segments. Upon appeal, the ITAT noted that a similar issue had been decided in favor of the assessee for the assessment year 2009-10, where the internal CUP and internal TNMM methods were accepted as the most appropriate methods. The ITAT reiterated that merely different pricing mechanisms should not lead to the rejection of the internal CUP method. The ITAT also emphasized that the internal TNMM method should be considered appropriate, as the functions performed, assets used, and risks assumed were similar for both AE and non-AE segments. The ITAT further addressed the external TNMM method, where the TPO had applied arbitrary filters for selecting comparable companies. The ITAT found that the TPO's selection of comparable companies was not justified, as the assessee had provided sufficient evidence to support the inclusion of its suggested comparables. 2. Levying of Consequential Interest under Section 234B and 234D of the Act: The assessee contested the computation of consequential interest under sections 234B and 234D of the Act. The CIT(A) had upheld the Assessing Officer's (AO) action in computing this interest. However, the ITAT did not provide a detailed analysis on this issue, as it was consequential to the primary issue of transfer pricing adjustment. The ITAT's decision on the transfer pricing adjustment would inherently affect the computation of interest under these sections. 3. Levy of Penalty under Section 271(1)(c) of the Act: The assessee also challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The CIT(A) had confirmed the AO's action in initiating these proceedings. Similar to the interest computation issue, the ITAT did not delve into a detailed analysis of the penalty issue, as it was contingent upon the resolution of the primary transfer pricing adjustment. The ITAT's favorable decision on the transfer pricing adjustment would likely impact the penalty proceedings. Conclusion: The ITAT allowed the appeal of the assessee, directing the TPO to accept the internal CUP and internal TNMM methods as the most appropriate methods for benchmarking the international transactions. The ITAT also instructed the TPO to reconsider the selection of comparable companies in line with the assessee's suggestions. Consequently, the issues of consequential interest and penalty proceedings were rendered moot, as they depended on the primary transfer pricing adjustment.
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