2018 (8) TMI 2030 - AT - Income Tax

TP Adjustment - selection of MAM - TPO rejecting CUP as the most appropriate method (MAM) to determine the arm's length price of the international transactions pertaining to provision of engineering design services to its AE as selected and applied by the appellant - HELD THAT - As relying on own case 2018 (6) TMI 1752 - ITAT PUNE as 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. Addition in respect of excess provision for interest on service tax - contention of the assessee is that this amount has been offered to tax in the subsequent assessment year when the actual amount of service tax liability got materialized - HELD THAT - Without going into the merits of the addition, we deem it appropriate to restore this issue to the file of Assessing Officer for verification. If the assessee has already offered the amount to tax in the subsequent assessment year the Assessing Officer is directed to grant relief to the assessee in assessment year under appeal as the same would amount to double taxation. The Assessing Officer before deciding this issue shall grant opportunity of haring to the assessee, in accordance with law.

Summary

Issues:
1. Transfer pricing adjustments using TNMM method.
2. Most appropriate method for benchmarking international transactions.
3. Excess provision for interest on service tax.
4. Initiation of penalty proceedings.

Transfer Pricing Adjustments using TNMM Method:
The appeal involved an assessment order under the Income Tax Act, 1961, regarding transfer pricing adjustments made by the Transfer Pricing Officer (TPO) using the Transactional Net Margin Method (TNMM). The Dispute Resolution Panel (DRP) upheld the adjustments, leading to an assessment order by the Assessing Officer. The core issue revolved around the most appropriate method for benchmarking international transactions, with the assessee arguing for the use of internal Comparable Uncontrolled Price (CUP) or TNMM. The Tribunal's decision in a previous year's case favored the assessee's stance on the method. Consequently, the Tribunal remitted the issue back to the TPO/Assessing Officer to decide in line with the previous order.

Most Appropriate Method for Benchmarking International Transactions:
The main issue raised by the assessee was the selection of the most appropriate method to determine the Arm's Length Price (ALP) for international transactions related to engineering design services. The assessee contended that the CUP method should have been used, while the TPO applied TNMM with external comparables. The Tribunal emphasized the importance of selecting the most appropriate method and directed the Assessing Officer/TPO to consider the internal TNMM method based on man-hour rates. The Tribunal highlighted the need to verify if the services provided to associated enterprises were at arm's length, stressing the relevance of hourly rates charged by the assessee. The Tribunal's decision favored the assessee's plea, directing a reevaluation by the Assessing Officer/TPO.

Excess Provision for Interest on Service Tax:
Regarding the excess provision for interest on service tax, the assessee argued that the amount had been offered for taxation in a subsequent assessment year when the actual liability materialized. The Tribunal directed the Assessing Officer to verify this claim and grant relief to prevent double taxation, emphasizing the need for a fair opportunity for the assessee during the verification process.

Initiation of Penalty Proceedings:
The appeal also challenged the initiation of penalty proceedings under specific sections of the Income Tax Act. The Tribunal deemed the challenge premature and dismissed the appeal related to penalty proceedings. Consequently, the overall appeal was partly allowed for statistical purposes based on the detailed analysis and decisions made on the various issues raised.

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