2016 (10) TMI 501 - HC - Income Tax

Transfer pricing adjustment - determine the profitability of the concerned comparable - Held that - On a comparison with the data available and made available, undoubtedly, the object of the statute is to pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ . The TNMM method depends on accurate data with respect to all the three elements wherever they apply. In the Comparable Uncontrolled Price (CUP) method - which is premised upon the elements in Rule 10B(1)(a), the methodology adopted is the price charged or paid for property transfer or services provided in the Comparable Uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue s contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable.

Issues:
1. Interpretation of Transfer Pricing Officer's report regarding exclusion of comparables in Arm's Length Price (ALP) determination.
2. Acceptance of Transactional Net Margin Method (TNMM) for ALP determination.
3. Dispute Resolution Panel's (DRP) decision on comparables and income adjustment.
4. Appellate Tribunal's exclusion of comparables and revenue's appeal.
5. Rationale for exclusion of specific comparables by the Appellate Tribunal.
6. Arguments regarding accuracy in transfer pricing exercise.
7. Exclusion of Wipro Technology Services Limited and its justification.
8. Application of TNMM method and relevant statutory provisions.

Analysis:
1. The primary issue in this case revolves around the interpretation of the Transfer Pricing Officer's report and the direction to exclude five comparables in the Arm's Length Price (ALP) determination for the assessee's international transactions in the relevant Assessment Year (AY) 2011-12.

2. The Transactional Net Margin Method (TNMM) was accepted as the most appropriate method for carrying out the ALP determination, with the assessee's profit margin being compared to that of five comparables. The Transfer Pricing Officer (TPO) observed discrepancies in the profit margins and made adjustments leading to income adjustments.

3. The Dispute Resolution Panel (DRP) intervened and directed the exclusion of certain comparables, resulting in reduced income adjustments. The DRP's decision was based on the reconsideration of comparables and their relevance to the ALP determination process.

4. The Appellate Tribunal further reviewed the case and accepted the exclusion of four comparables based on detailed consideration of materials. The revenue challenged this decision, particularly concerning the exclusion of specific companies like Wipro Technology Services Limited.

5. Arguments were presented regarding the rationale behind the exclusion of certain comparables by the Appellate Tribunal, emphasizing the availability of segmental data and the accuracy of the TNMM exercise in determining the ALP.

6. The accuracy of the transfer pricing exercise was a key point of contention, with the focus on Operating Cost and Operating Profits as crucial elements in the TNMM method. The importance of precise data for accurate ALP determination was highlighted.

7. The exclusion of Wipro Technology Services Limited was debated, with the revenue failing to provide substantial grounds for challenging its exclusion. The core issue was whether the exclusion of comparables by the TPO was erroneous.

8. The application of the TNMM method and relevant statutory provisions, such as Rule 10B(1)(e), was crucial in determining the appropriateness of comparables and the accuracy of the ALP determination process. The methodology adopted in transfer pricing aimed to capture income incidents within the jurisdiction effectively.

In conclusion, the judgment dismissed the appeal, emphasizing the importance of accurate data and appropriate filters in the transfer pricing methodology for determining the Arm's Length Price in international transactions.

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