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2016 (9) TMI 403 - AT - Income TaxTransfer pricing adjustment - whether the price determined under MAP mechanism can be adopted even in respect of non- MAP transactions? - Held that - We are of the considered opinion that this issue can be decided only by the TPO after undertaking FAR analysis of non-US transactions with a view to find out whether there is any distinction in the factors influencing the price between US and non-US transactions. Even in the decision relied on by the learned counsel for the assessee, the Hon ble Tribunal had rendered a categorical finding that there is no such distinction. We, therefore, direct the TPO to adopt the same price. In the present case, no attempt has been made by the learned counsel for the assessee to bring out the similarities of the factors that influenced the price between US and non-US transactions. In the absence of this analysis, comparability may not be in terms of the provisions of rule 10B(1)(2) of the IT Rules, 1962. Therefore, we are of the considered opinion that the matter be restored to the file of the TPO/AO for fresh analysis on the lines between US and non-US transactions and if it is found that factors influencing the price are similar between US and non- US transaction, the price adopted for US transactions may be adopted for non-Us transactions also. Before we part with, we must make it clear that it is open to the TPO to examine the validity of the proposition that price adopted under MAP mechanism can be adopted in respect of other countries also where MAP was not resorted to. Reduction of telecommunication expenses export turnover - Held that - As now the law is quite settled that while reducing telecommunication expenses from export turnover, the same should also be reduced from the total turnover on the reasons of parity as held by the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT ). Accordingly, we direct the TPO/AO to reduce the telecommunication expenses from the export turnover as well as the turnover while computing deduction u/s 10A of the Act.
Issues Involved:
1. Transfer Pricing Adjustment under Section 92CA of the Act. 2. Powers under Section 133(6) and principles of natural justice. 3. Application of the Related Party Transaction (RPT) filter. 4. Use of contemporaneous data. 5. Market Risk Adjustment. 6. Safe harbour and application of ±5% Arm's length range. 7. Anti-Avoidance Provisions. 8. Employee cost filter. 9. Acceptance and rejection of comparables. 10. Deduction under Section 10A of the Act. Detailed Analysis: 1. Transfer Pricing Adjustment under Section 92CA of the Act: The assessee challenged the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) on several grounds. The primary objections were related to the rejection of Comparable Uncontrolled Price (CUP) data, combining transactions of different segments, and the arbitrary selection of comparables. The Tribunal noted that the assessee had opted for the Mutual Agreement Procedure (MAP) under Article 25 of the India-US Double Tax Avoidance Agreement, accepting the terms for transactions with US entities. The Tribunal directed the Transfer Pricing Officer (TPO) to undertake a fresh analysis to determine if the same price could be adopted for non-US transactions, emphasizing the need for a detailed Functional, Asset, and Risk (FAR) analysis. 2. Powers under Section 133(6) and principles of natural justice: The assessee contended that the powers under Section 133(6) were not employed judiciously, and the principles of natural justice were violated. The Tribunal noted that the TPO had relied on information obtained through Section 133(6) without considering the information available in the public domain. The Tribunal directed the TPO to ensure compliance with the principles of natural justice. 3. Application of the Related Party Transaction (RPT) filter: The assessee argued against the 25% RPT threshold limit set by the TPO for accepting or eliminating comparables. The Tribunal noted the inconsistency in applying the RPT filter and directed the TPO to re-evaluate the threshold limit, considering judicial precedents. 4. Use of contemporaneous data: The Tribunal agreed with the assessee's contention that the use of multiple-year data ensures a more accurate determination of transfer prices. The Tribunal directed the TPO to consider the objective underlying the use of multiple-year data. 5. Market Risk Adjustment: The Tribunal found merit in the assessee's argument that market risk adjustment should be allowed based on the Capital Asset Pricing Model (CAPM). The Tribunal directed the TPO to re-evaluate the market risk adjustment, considering the differences in the functional profiles of the assessee and the comparables. 6. Safe harbour and application of ±5% Arm's length range: The Tribunal held that the amended provision regarding the arm's length range as per the Finance Act 2009 was not applicable retrospectively. The Tribunal directed the TPO to apply the ±5% range correctly. 7. Anti-Avoidance Provisions: The Tribunal noted that the transfer pricing provisions are anti-avoidance measures and should be interpreted strictly. The Tribunal directed the TPO to ensure compliance with the anti-avoidance provisions. 8. Employee cost filter: The assessee argued that the employee cost filter of 25% of revenue should be applied to the ITES segment as well. The Tribunal directed the TPO to re-evaluate the application of the employee cost filter. 9. Acceptance and rejection of comparables: The Tribunal addressed the assessee's objections regarding the acceptance and rejection of specific comparables. The Tribunal directed the TPO to re-evaluate the comparables, considering the objections raised by the assessee. 10. Deduction under Section 10A of the Act: The Tribunal held that telecommunication expenses should be reduced from both export turnover and total turnover while computing the deduction under Section 10A. The Tribunal directed the AO to re-compute the deduction accordingly. The Tribunal also noted that the additional grounds raised by the assessee pertained to transactions with US entities, which were not part of the subject matter of the appeal, and hence, were not admitted for adjudication. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes, with directions to the TPO and AO for fresh analysis and re-evaluation on several issues. The Tribunal emphasized the need for compliance with principles of natural justice and judicial precedents in the re-evaluation process.
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