2018 (6) TMI 1752 - AT - Income Tax

TP Adjustment - adjustment made in engineering design services provided by the assessee to its associated enterprises - selection of MAM - assessee had selected TNMM method as most appropriate method by taking itself as the tested part as rejected by TPO - HELD THAT - As already taken a view in the case of DCIT Vs. Man Trucks India Pvt. Ltd 2018 (4) TMI 501 - ITAT PUNE and 2018 (4) TMI 501 - ITAT PUNE relating to assessment year 2009-10, order dated 03.04.2018, where the costs are identical for providing services, then even if the costs borne for associated enterprises and non-associated enterprises or the domestic parties are same, the same can be ignored in order to benchmark arm's length price of international transactions undertaken by the assessee. Accordingly, we find merit in the plea of assessee that hourly rates charged by it in providing specialized services to its associated enterprises can be the basis for verifying its stand as to whether the services provided by the assessee to its associated enterprises were at arm's length. However, the stand of Assessing Officer / TPO in rejecting the said plea of assessee was the tainted transactions vis- -vis costs incurred by the assessee both for associated enterprises and non-associated enterprises. In the totality of the above said facts and circumstances, where the stand of assessee has not been looked into by the TPO and has been brushed aside, we in the interest of justice, direct the Assessing Officer/TPO to determine arm's length price of international transactions undertaken by the assessee by applying most appropriate method i.e. internal TNMM method of man hourly rates. The assessee has also asked for various other adjustments for carving out differences which may also be looked into by the TPO, who shall decide the issue after affording reasonable opportunity of hearing to the assessee and determine arm's length price of international transactions.

Issues Involved:
1. Jurisdiction of Transfer Pricing proceedings under section 92CA(1) of the Income-tax Act.
2. Assessment of income and upward adjustment by the AO/DRP/TPO.
3. Rejection of CUP method and application of TNMM method for determining the arm's length price.
4. Selection of comparables and rejection of internal TNMM analysis.
5. Deduction of extraordinary costs related to under-utilization of capacity.
6. Levy of interest under sections 234A, 234B, 234C, 234D, and 201(1A).
7. Initiation of penalty proceedings under section 274 r.w.s. 271(1)(c).

Issue-wise Detailed Analysis:

1. Jurisdiction of Transfer Pricing proceedings under section 92CA(1) of the Income-tax Act:
The assessee challenged the initiation of transfer pricing proceedings, claiming they were without jurisdiction and should be quashed. However, the Tribunal did not find merit in this ground and proceeded with the substantive issues of the appeal.

2. Assessment of income and upward adjustment by the AO/DRP/TPO:
The assessee declared a loss of INR 7,13,86,774, but the AO assessed the income at INR 1,74,66,480 following the directions of the DRP. The main contention was the addition of INR 8,88,53,258 as an upward adjustment made by the TPO while determining the arm's length price for international transactions related to engineering design services.

3. Rejection of CUP method and application of TNMM method for determining the arm's length price:
The assessee initially selected the TNMM method in its TP study report but later switched to the CUP method during TP proceedings, arguing that the budgeted rates should be applied. The TPO rejected the CUP method due to several infirmities, including differences in functional and risk profiles and the presence of controlled transactions in both AE and non-AE segments. The TPO instead applied the TNMM method, selecting comparables and determining the mean margins to propose an adjustment of INR 8,88,53,258.

4. Selection of comparables and rejection of internal TNMM analysis:
The TPO selected external comparables, which the assessee contested as not functionally comparable. The assessee argued for the acceptance of its internal TNMM analysis, which showed higher operating profit margins compared to the selected comparables. The Tribunal noted the need for a proper benchmarking method and directed the TPO to reconsider the most appropriate method, taking into account the internal TNMM analysis.

5. Deduction of extraordinary costs related to under-utilization of capacity:
The assessee claimed deductions for extraordinary costs related to under-utilization of capacity and infrastructure, which were not considered by the AO/DRP/TPO. The Tribunal directed the TPO to look into these adjustments and decide the issue after affording a reasonable opportunity of hearing to the assessee.

6. Levy of interest under sections 234A, 234B, 234C, 234D, and 201(1A):
The assessee contested the levy of interest under various sections of the Act. The Tribunal's decision on this issue would depend on the final determination of the arm's length price and the resultant tax liability.

7. Initiation of penalty proceedings under section 274 r.w.s. 271(1)(c):
The assessee also contested the initiation of penalty proceedings. The Tribunal's decision on this matter would follow the outcome of the substantive issues related to the transfer pricing adjustments.

Conclusion:
The Tribunal acknowledged the complexity of the case, especially the changing stands of the assessee regarding the most appropriate method for benchmarking international transactions. It directed the TPO to re-evaluate the arm's length price determination, considering the internal TNMM method and the various adjustments claimed by the assessee. The appeal was allowed for statistical purposes, with the matter remitted back to the TPO/AO for a fresh determination.

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