2022 (3) TMI 1468 - AT - Income Tax

TP Adjustment - arm s length price adjustment (ALP) in respect of provision for software development services - TPO rejected the CPM method and adopted Transactional Net Margin Method (TNMM) - as submitted TPO erred in recommending the said ALP adjustment and the Dispute Resolution Panel erred in confirming the said ALP adjustment - HELD THAT - We are of the considered view that the reasons for which internal TNMM is rejected as a most appropriate method (MAM) are not really correct and convincing. The disclaimer by the auditor with respect to information and explanation provided to us (i.e. the auditor) is too common a disclaimer which is almost a standard practice and in any case there is no specific information that is sought to be disclaimed vis- -vis it s authenticity. It is not a clear as to which is the figure with respect to authenticity of which learned TPO had doubts. It was open to TPO to ask a specific question and deal with the reply thereto or to at least point out which is the information in respect of which he had issues. This disclaimer may raise a bonafide doubt but that cannot be reason enough to reject the segmental accounts as a whole. Rejecting the internal TNMM on the basis of such a sweeping generalization cannot meet a judicial approval. Similarly the segmental accounts showing different PLIs in different segments i.e. 13.79%-153.9% as against 8.01%-9.44% cannot be reason enough to reject the segmental accounts. Having said that the observations regarding allocation of expenses have been arbitrarily done resulting in skewed result need to be examined on merits by calling for further explanations of the assessee and taking a call on those explanations in a fair and reasonable manner in accordance with the law and by giving yet another opportunity of hearing we are thus of the considered view that while we must uphold the plea of the assessee in principle we should remit the matter to the assessment stage so that the matter may be examined afresh in the terms indicated above. The limited purpose of adjudicating upon the expense allocation basis and if no defects are found in the same the internal TNMM will have to be accepted. In any other case however all contentions will remain open. With these observations the matter stands restored to the file of the AO. As the matter is remitted to the assessment stage for this short reason alone all other issues raised in the appeal are academic and infructuous as now.

Summary

Issues:
1. Arm's length price adjustment for provision of software development services
2. Rejection of internal TNMM method by Transfer Pricing Officer
3. Upholding of the Arm's Length Adjustment by Dispute Resolution Panel
4. Rejection of segmental audit report by TPO
5. Appeal against Assessing Officer's decision on depreciation

Analysis:

Issue 1: Arm's length price adjustment for provision of software development services
The appellant challenged the correctness of the arm's length price adjustment (ALP) made by the Assessing Officer for provision of software development services. The Transfer Pricing Officer rejected the Cost Plus Method (CPM) and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO rejected the internal TNMM submitted by the assessee due to shortcomings in the segmental accounts. The Dispute Resolution Panel upheld the ALP adjustment. The ITAT found the reasons for rejecting internal TNMM unconvincing, stating that the disclaimer by the auditor was common practice and did not warrant rejection. The ITAT remitted the matter to the assessment stage for further examination of expense allocation, directing a fair and reasonable assessment in accordance with the law.

Issue 2: Rejection of internal TNMM method by Transfer Pricing Officer
The Transfer Pricing Officer rejected the internal TNMM method submitted by the assessee for benchmarking, citing shortcomings in the segmental accounts provided. The TPO found issues with the authenticity of the segmental audit report and the allocation of expenses, leading to the rejection of internal TNMM. The ITAT disagreed with the rejection, stating that the reasons provided were not convincing and directed a re-examination of the matter at the assessment stage.

Issue 3: Upholding of the Arm's Length Adjustment by Dispute Resolution Panel
The Dispute Resolution Panel upheld the arm's length adjustment made by the Transfer Pricing Officer, rejecting the objections raised by the assessee. The ITAT remitted the matter to the assessment stage for further examination, finding the rejection of internal TNMM unjustified.

Issue 4: Rejection of segmental audit report by Transfer Pricing Officer
The Transfer Pricing Officer rejected the segmental audit report provided by the assessee, citing issues with authenticity and expense allocation. The rejection led to the benchmarking being done at the entity level under TNMM. The ITAT found the rejection unjustified and remitted the matter to the assessment stage for a fair assessment based on proper explanations from the assessee.

Issue 5: Appeal against Assessing Officer's decision on depreciation
The appellant raised a grievance against the Assessing Officer's decision to decline depreciation of a certain amount. However, due to the smallness of the amount, the grievance was not pressed and the appeal was allowed for statistical purposes.

In conclusion, the ITAT allowed the appeal for statistical purposes and remitted the matter to the assessment stage for a fresh examination in light of the observations made regarding the rejection of internal TNMM and the segmental audit report.