2024 (8) TMI 1546 - AT - Income Tax

TP Adjustment - determining the Arm s Length Price of international transaction to be 50% of the amount paid by the Assessee to its AE for receipt of Intra Group Services from its AE s - TPO observed that the assessee has submitted Performance score card which showed evaluation of services but failed to establish its authenticity and neither submitted any evidence regarding the details how such services were received - HELD THAT - Considering the profile of the Assessee and the business structure of the Assessee we find that the T.P.O. is not correct in arriving the ALP at NIL on the ground that the Assessee has not produced the evidence for the receipt/rendering of service. TPO should have looked into all the evidences submitted by the assessee and give finding after adjudicating the same. It is an accepted fact that the transaction between the Assessee and AE will be always subjective in nature it is fact that the assessee American Express being a running and established foreign entity and they have established the business in India. Thus there is a considerable advantage engaged by Indian entity hence there is a greater chance of Intra Group Services transferred to Indian entity which has to be verified by the TPO by applying applicable transfer pricing mechanism as per Income Tax Rules and determine the TP Adjustment. We once again reiterate that the TP Adjustment cannot be at NIL as determined by the TPO. Accordingly with the above observations we remand the matter to the file of TPO for determining the ALP afresh. Rejection of Company selected by the Assessee CG Vak Software and Exports Ltd - No error or infirmity in the findings and conclusion of the Ld. CIT (A) in excluding M/s CG VAK Software and Exports Ltd. from the final list of comparables as failing turnover filter and are engaged in providing software development services thus the same are not comparables. Cepha Imaging Pvt. Ltd. meets the exports earning filter as adopted by the TPO. In our considered opinion the Ld. CIT (A) has rightly directed the A.O/TPO to verify the export earning of the Company and to include the said in the final list of the Company if Company passes the export earning filter. R System International Ltd. - No error the action of the Ld. CIT (A) in directing the TPO to consider R System International Ltd. in final list of comparables if quarterly audited data is provided by the assessee for computing the operating profit margin for the instant Assessment Year. Coral Hub Ltd. and Cosmic Global Ltd. be excluded from the list of comparables as a captive unit cannot be compared with a giant case. EClerx Services and ICRA Online Companies be excluded as perused the annual report including the business over views and management discussion analysis in annual reports. The above Companies have claim to be leading knowledge process outsourcing Companies providing data analytic and data process out sources to some of the largest brand of the world and the said Companies are engaged in providing KPO Services i.e. high end ITEs. In our considered opinion the said findings and the conclusion of the Ld. CIT (A) requires no interference.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Transfer Pricing Officer (TPO) correctly determined the Arm's Length Price (ALP) for Intra Group Services (IGS) as NIL due to lack of evidence provided by the assessee.
• Whether the CIT (A) was justified in granting 50% relief to the assessee on the transfer pricing adjustment for IGS.
• Whether the selection and rejection of comparable companies by the TPO and CIT (A) for benchmarking international transactions were appropriate.
• Whether the CIT (A) correctly included or excluded certain companies from the final list of comparables based on their functional profiles and turnover filters.
• Whether the CIT (A) was correct in directing the inclusion of certain companies if they met specific criteria, such as export earnings filter or quarterly audited data availability.

ISSUE-WISE DETAILED ANALYSIS

Intra Group Services (IGS) - ALP Determination

• Relevant Legal Framework and Precedents: The determination of ALP for IGS is guided by the OECD Transfer Pricing Guidelines and relevant sections of the Income Tax Act, 1961, including Section 92C and Rule 10B.
• Court's Interpretation and Reasoning: The TPO determined the ALP of IGS as NIL due to the assessee's failure to provide evidence of services received. The CIT (A) granted 50% relief, assuming some services were availed, but did not elaborate on the evidence considered.
• Key Evidence and Findings: The TPO found no documentary evidence supporting the receipt of services claimed by the assessee. The CIT (A) believed there was enough material to conclude some services were availed.
• Application of Law to Facts: The TPO applied the Comparable Uncontrolled Price (CUP) method, treating the ALP as NIL due to lack of evidence. The CIT (A) partially disagreed, granting partial relief based on assumed service receipt.
• Treatment of Competing Arguments: The assessee argued for the necessity and receipt of services, while the TPO highlighted the absence of evidence. The CIT (A) attempted a middle ground by granting partial relief.
• Conclusions: The Tribunal remanded the matter to the TPO for a fresh determination of the ALP, emphasizing the need for a thorough examination of evidence.

Selection and Rejection of Comparable Companies

• Relevant Legal Framework and Precedents: The selection of comparables follows Rule 10B of the Income Tax Rules, focusing on functional similarity and turnover filters.
• Court's Interpretation and Reasoning: The Tribunal evaluated the CIT (A)'s decisions on including or excluding comparables based on functional profiles, turnover, and other criteria.
• Key Evidence and Findings: The Tribunal considered annual reports, functional profiles, and turnover data to assess comparability.
• Application of Law to Facts: The Tribunal upheld the CIT (A)'s decisions where they aligned with legal standards and evidence, such as the inclusion of Cepha Imaging Pvt. Ltd. based on export earnings.
• Treatment of Competing Arguments: The Department challenged the inclusion/exclusion of certain companies, arguing functional dissimilarity or procedural errors. The Tribunal assessed these claims against the evidence.
• Conclusions: The Tribunal upheld most of the CIT (A)'s decisions, dismissing the Department's grounds for appeal where they lacked merit.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The TP Adjustment cannot be at 'NIL' as determined by the TPO. Accordingly with the above observations, we remand the matter to the file of TPO for determining the ALP afresh."
• Core Principles Established: The necessity for comprehensive evidence in determining ALP for IGS and the importance of functional comparability in selecting benchmarking companies.
• Final Determinations on Each Issue: The Tribunal remanded the IGS ALP determination to the TPO for reconsideration and upheld the CIT (A)'s decisions on comparable companies, dismissing the Department's appeals on these grounds.