2022 (5) TMI 1423 - AT - Income Tax

TP Adjustment - ALP of international transaction of assessee - selection of MAM - Assessee seeked to change most appropriate method from TNMM to the other method - adoption of other method prescribed under Rule 10AB of the Income Tax Rules as the most appropriate method for benchmarking services income - HELD THAT - We see no harm in allowing the assessee to change most appropriate method from TNMM to the other method . This is more so because the original MAM i.e. e Transactional Net Margin Method adopted by the assessee in its Transfer pricing study report is without any analysis and learned Transfer Pricing Officer accepted the same without proper examination. DRP rejected only for the reason that now assessee cannot change the method which it has accepted as most appropriate method earlier. Further whether the quotation can be accepted as benchmarking evidence under Rule 10BA is also supported by the decision of Hon ble Delhi High court In Toll Global Forwarding Limited 2015 (12) TMI 1513 - DELHI HIGH COURT as well as co-ordinate Bench in Gulf Energy Maritime Services Pvt. Ltd. 2016 (3) TMI 216 - ITAT MUMBAI . In view of this we hold that assessee can adopt other method prescribed under Rule 10AB of the Income Tax Rules as the most appropriate method for benchmarking services income received by the assessee from its associated enterprises. Also assessee has submitted additional evidence in the form of comparables quotations from third party service provider in support of rates charged by the assessee. We find that these evidences at page no. 463 of the Paper Book is the rate quoted by Enser Communication Pvt. Ltd to the Associated Enterprises on 6th January 2020 of 10 per login hour. Similarly at page no. 475 Rhombus on 14th September 2012 has quoted man hour rate of 8.5. Further at page no. 475 Synergies outsourcing Pvt. Ltd. vide quotation dated 28th January 2020 has also given the rate of 10 per man-hour. As these quotes are available with the Associated Enterprises for similar services therefore the FAR of these quotes are similar with the agreement of the assessee hence comparable. However we hastened to say that website rates could not be accepted without proper examination of FAR and other comparability. But for the reason that As the rates charged by the assessee is higher than the rates quoted by third party suppliers which is permissible in the other method we hold that the international transactions carried out by the assessee is at arm s length. In view of this we allow ground no. 1.3 of the appeal of the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Erroneous Computation of Tax Demand
3. Penalty Proceedings

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around the addition of INR 2,21,23,649/- to the value of international transactions for services rendered to the Associated Enterprise (AE). The appellant contended that no transfer pricing adjustment was warranted. The Dispute Resolution Panel (DRP), Assessing Officer (AO), and Transfer Pricing Officer (TPO) were criticized for using the Transactional Net Margin Method (TNMM) instead of the 'Other Method' prescribed under Rule 10AB of the Income-tax Act for benchmarking the services. The appellant argued that the TNMM was not the most appropriate method and that comparable quotes from third-party service providers supporting an hourly rate of USD 10 were ignored. The DRP/TPO also erred in selecting certain companies as comparables which were not functionally similar to the appellant. The appellant further claimed that the DRP/TPO wrongly determined the arm's length margin of 19.81% on costs, ignoring the factual position of the AE's earnings and the potential loss incurred by the AE if the addition was sustained. Additional evidence submitted by the appellant during the DRP proceedings was rejected on the grounds that sufficient opportunity was given during the original TP proceedings, and the additional evidence was deemed an afterthought.

The Tribunal found that the appellant's transfer pricing study report was inadequate as it did not provide a comparability study but merely stated that the login hour rate charged to the AE was at arm's length. The TPO accepted the TNMM without proper examination, and the DRP upheld this method without considering the appellant's request to adopt the 'Other Method'. The Tribunal noted that the appellant had provided reasonable evidence supporting the 'Other Method' as the most appropriate method, including third-party quotations and website rates indicating similar services at comparable rates. The Tribunal allowed the appellant to adopt the 'Other Method' for benchmarking, concluding that the international transactions were at arm's length.

2. Erroneous Computation of Tax Demand:
The appellant argued that the AO erroneously computed the tax demand, considering the transfer pricing adjustment twice, resulting in an inflated total income and higher tax demand. The Tribunal did not provide a detailed discussion on this issue, as the primary focus was on the transfer pricing adjustment and the method adopted for benchmarking.

3. Penalty Proceedings:
The appellant contended that the AO erred in initiating penalty proceedings under section 274 r.w.s. 271AA of the Income-tax Act. The Tribunal dismissed this ground as premature, indicating that it was not yet ripe for adjudication.

Conclusion:
The Tribunal partly allowed the appeal, primarily on the grounds of adopting the 'Other Method' for transfer pricing analysis, thereby determining that the international transactions were at arm's length. The other grounds related to TNMM, comparability analysis, and penalty proceedings were dismissed as infructuous or premature.