2019 (3) TMI 1919 - AT - Income Tax

TP Adjustment - international transactions undertaken with the associated enterprise - rejection of segmentation - internal comparison of profitability from the international transactions with unrelated - HELD THAT - As following the decisions of Birla Soft . 2015 (4) TMI 1239 - DELHI HIGH COURT we set aside the order of the AO /TPO and remit this issue back to the file of the AO / TPO for determining the arm s length price in respect of the international transactions undertaken with the associated enterprise be determined by making internal comparison of profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments. The assessee shall place all relevant materials before the AO/TPO and comply to the requirements of AO/TPO in accordance with law. The AO/TPO shall after affording effective opportunity to the assessee shall decide this issue in accordance with law. ALP adjustment on the entire turnover (including revenue from third party customers) of the assessee - HELD THAT - As following the order of this Tribunal in the case of M/s. Yongsan Automative India Pvt. Ltd 2017 (12) TMI 855 - ITAT CHENNAI we hold that the transfer pricing adjustment has to be made only in respect of the transaction of the assessee being a tested party with associated enterprise outside the country after comparing the transaction made by similarly placed company in uncontrolled transaction with non-Associated Enterprise. Therefore we are unable to uphold the order of the Dispute Resolution Panel. Accordingly the order of the DRP is set aside and the entire issue is remitted back to the file of the AO/TPO. Assessee s appeal is treated as partly allowed for statistical purposes.

Summary

Issues:
1. Rejection of segmentation approach by the Appellant.
2. Direction by DRP to compute ALP adjustment on entire turnover.

Detailed Analysis:

Issue 1: Rejection of Segmentation Approach
The appeal was filed against the order of the Deputy Commissioner of Income Tax for the assessment year 2012-13. The Appellant, a software services company, had entered into international transactions for software development services. The Appellant adopted the TNMM as the most appropriate method with NCP as the PLI. The Appellant presented an internal TNMM analysis based on segmentation of financials between its AE and non-AE segment. The TPO rejected the segmental approach, stating it was prepared after a show cause notice and without separate cost centers. The DRP directed the AO to compute the ALP adjustment on the entire turnover, including revenue from third party customers. The Appellant contended that the rejection of the segmentation approach was erroneous and violated principles of natural justice. The Ld. AR referred to a Delhi Bench decision and a judgment of the Delhi High Court to support the Appellant's argument. The Tribunal set aside the order of the AO/TPO and remitted the issue back for determining the arm's length price.

Issue 2: Direction to Compute ALP Adjustment on Entire Turnover
The DRP directed the AO to compute the ALP adjustment on the entire turnover, including revenue from third party customers. The Tribunal, following a previous case, held that transfer pricing adjustment should only be made in respect of transactions with associated enterprises outside the country. The Tribunal set aside the DRP's order and remitted the issue back to the AO/TPO for proper determination. As a result, the appeal was treated as partly allowed for statistical purposes.

In conclusion, the Tribunal's judgment addressed the issues of rejection of segmentation approach and the direction to compute ALP adjustment comprehensively, setting aside the previous orders and remitting the issues back for proper determination in accordance with the law.