2022 (6) TMI 1367 - AT - Income Tax

TP Adjustment - MAM selection - contradicting observations about the MAM followed by the assessee for determination of ALP - TPO has stated that the assessee has followed TNMM as MAM, whereas again he has noted that assessee has followed internal CUP method for arriving at the ALP - HELD THAT - The basis on which the TPO has proceeded with the comparability analysis is on the wrong fact that the assessee followed CUP method as the MAM. DRP has also not taken note of this contradicting findings of the TPO in his order and has proceeded to confirm the TP adjustment made by the TPO. The assessee in its TP study has clearly stated that the MAM followed in arriving at the ALP by the assessee is TNMM. Application of internal TNMM and other external comparables followed by the assessee - As we notice that the coordinate Bench of the Tribunal in assessee s own case for the AYs 2011-12 2012-13 has upheld the internal TNMM used by the assessee for determination of the ALP for international transactions. Since the TPO in the present year under consideration has proceeded to make the TP adjustment on the mistaken fact that assessee has followed CUP method, we deem it fit and appropriate to remit this issue back to the TPO for fresh analysis considering the actual method followed by the assessee i.e., TNMM as the MAM. The TPO is also directed to consider the principles laid down by the coordinate Bench of the Tribunal in the earlier years in assessee s own case in terms of considering the internal comparables for TNMM and also the stand taken by the TPO for the AY 2016-17 where the internal comparables has been accepted. Appeal by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Application of the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method.
3. Consistency in the application of internal benchmarking for Transfer Pricing (TP) analysis.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The primary issue revolves around the determination of the ALP for the international transactions undertaken by the assessee, specifically in the provision of software development (SWD) services to its Associated Enterprises (AEs). The assessee, a company with significant international transactions, applied the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) questioned the method and comparables used by the assessee, leading to a Transfer Pricing adjustment of Rs. 17,18,13,781.

2. Application of the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) Method:
The TPO erroneously considered that the assessee followed the CUP method instead of TNMM for arriving at the ALP. The TPO's order contained contradictory observations, stating in one part that the assessee used TNMM and in another that it used the CUP method. The Tribunal noted this contradiction and highlighted that the assessee had clearly stated in its TP documentation that TNMM was the MAM used. This misinterpretation by the TPO formed the basis for the TP adjustment, which was subsequently confirmed by the Dispute Resolution Panel (DRP).

3. Consistency in the Application of Internal Benchmarking for Transfer Pricing (TP) Analysis:
The assessee argued that in previous assessment years (AYs 2008-09 to 2013-14 and 2016-17), the internal benchmarking approach using TNMM was accepted by the TPO and the Tribunal. The Tribunal's earlier decisions had upheld the internal TNMM used by the assessee for determining the ALP, emphasizing that internal benchmarking should be preferred if possible. The Tribunal referenced its previous rulings, which stated that if the assessee could establish that similar transactions were undertaken with AEs and non-AEs in the same countries, internal benchmarking should be applied. The Tribunal also noted that the TPO had accepted the internal comparables for AY 2016-17, indicating inconsistency in the TPO's approach for the current year under consideration.

Conclusion:
The Tribunal concluded that the TPO's TP adjustment was based on a mistaken fact regarding the method used by the assessee (CUP vs. TNMM). The Tribunal remitted the issue back to the TPO for fresh analysis, directing the TPO to consider the actual method followed by the assessee (TNMM) and to adhere to the principles laid down in the Tribunal's earlier decisions regarding internal comparables. The Tribunal emphasized the need for consistency and directed the TPO to give the assessee an opportunity to be heard.

Final Judgment:
The appeal by the assessee was allowed for statistical purposes, and the Stay Petition filed by the assessee was dismissed as infructuous. The judgment was pronounced in the open court on June 8, 2022.