2018 (6) TMI 1805 - AT - Income Tax

TP Adjustment relating to management services and professional consultancy services - HELD THAT - As decided in own case 2016 (8) TMI 950 - ITAT DELHI assessee divided its operation in the manufacturing and distribution segment. In the manufacturing segment, the net profit margin (OP/Sales) was disclosed at 9.26%, assessee has selected 5 comparable companies and using three years financial data margin of comparables had been computed at 8.40%. In the distribution segment, the assessee has selected TNMM as most appropriate method and the tested party margin had been computed at 15.21% as compared to average margin of 6 comparables using 3 years financial data at 3.96% and the international transactions were claimed at arm s length. We, therefore, keeping in view the aforesaid discussion are of the view that the impugned addition made by the AO on account of the adjustment made in the receipt of professional consultancy services and management support services rendered by the employees of the AE, was not justified. In that view of the matter we delete the impugned addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment of total income by the CIT(A)/AO/TPO.
2. Segregation of closely linked transactions and rejection of the TNMM.
3. Adoption of the Comparable Uncontrolled Price (CUP) method as the most appropriate method.
4. Transfer pricing adjustment based on incorrect assumptions.
5. Questioning the commercial rationale of legitimate business expenses.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Adjustment of Total Income:
The main grievance of the assessee was the confirmation of an addition of Rs. 50,333,442 made by the AO on account of transfer pricing adjustment related to management services and professional consultancy services. The CIT(A) upheld this adjustment based on previous identical adjustments made for the assessment year 2007-08, which were initially upheld by the ITAT but later set aside by the Hon'ble Jurisdictional High Court for fresh adjudication.

2. Segregation of Closely Linked Transactions and Rejection of the TNMM:
The CIT(A)/AO/TPO erred in rejecting the Transactional Net Margin Method (TNMM), which was used by the appellant to benchmark closely linked transactions together. Instead, they segregated these transactions to determine the arm's length price (ALP) as NIL. The appellant argued that the receipt of management support services and professional consultancy services were closely linked to the overall business activities and should not have been analyzed separately.

3. Adoption of the Comparable Uncontrolled Price (CUP) Method:
The CIT(A)/AO/TPO adopted the CUP method as the most appropriate method for determining the ALP without identifying any comparable uncontrolled transactions. The appellant contended that the CUP method was not applied correctly as per Rule 10B(1)(a) of the Income Tax Rules, 1962, and that the TNMM was more appropriate given the circumstances.

4. Transfer Pricing Adjustment Based on Incorrect Assumptions:
The CIT(A)/AO/TPO ignored relevant submissions, information, and documents provided by the appellant to substantiate the receipt of services. They reached an inappropriate conclusion that the arm's length value of the impugned transactions should be NIL. The appellant had established that the services received from its AE led to an increase in export sales and gross margin, which indicated that the decision to avail these services was beneficial for the business.

5. Questioning the Commercial Rationale of Legitimate Business Expenses:
The CIT(A)/AO/TPO questioned the commercial rationale behind the legitimate business expenses incurred by the taxpayer, which is beyond the scope of assessment under section 92CA. The Hon'ble Jurisdictional High Court had previously observed that the determination of whether a transaction is at an arm's length price should not depend on whether it results in an increase in the assessee's profit. The focus should be on whether the transaction was bona fide and not a sham for diverting profits.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant also contested the initiation of penalty proceedings under section 271(1)(c) of the Act, arguing that the adjustments made were not justified and that the transactions were bona fide.

Conclusion:
The ITAT considered the submissions of both parties and noted that an identical issue with similar facts had been decided in favor of the assessee in previous years. The ITAT found that the appellant had provided sufficient evidence to support the services received from its AE and that the TNMM was the most appropriate method for determining the ALP. The ITAT concluded that the impugned addition made by the AO was not justified and deleted the addition. Consequently, the appeals of the assessee were allowed.

(Order Pronounced in the open Court on 28/06/2018)