2024 (3) TMI 1304 - AT - Income Tax

TP Adjustment - Provision of Administrative and Agency Services - Determination of Arm's Length Price (ALP) - allocation of expenses relating to income streams between two segments - HELD THAT - As seen that the assessee has allocated common expenses and has also given basis of apportionment. We find that the CIT(A) has put a doubt on whether segmental accounts are to be accepted and the only reason given by the authorities, as we understand from the respective orders, is that it is not audited. Merely because segmental accounts are not audited cannot make them untrustworthy without pointing out any specific defect/error/fallacy in them. Observations of the ld. CIT(A) that non compete fee and good will has not been allocated is not accepted as the TPO himself has not allocated these expenses. Assessee has not only provided segmental account but has also allocated expenses and has given basis of allocation. We do not find any merit in the stand taken by the TPO/AO as confirmed by the ld. CIT(A). We, accordingly, direct the AO to delete the impugned adjustment. Appeal of assessee allowed.

Summary

Issues involved:
The judgment involves issues related to Transfer Pricing adjustments, application of TNMM, rejection of segmental accounts, allocation of expenses, and adherence to principles of natural justice.

Transfer Pricing Adjustments:
The appellant challenged the determination of the ALP of international transactions, arguing that the action was beyond the jurisdiction of the Assessing Officer and based on incorrect facts and findings. The CIT(A) upheld the reference made to the transfer pricing officer under section 92CA(3) and the application of TNMM at the enterprise level, rejecting the appellant's TP analysis. The appellant's grounds of appeal emphasized errors in law and facts in the impugned order.

Application of TNMM and Rejection of Segmental Accounts:
The appellant utilized TNMM for various international transactions and provided detailed benchmarking analysis. However, the TPO and CIT(A) raised concerns about the segmentation of accounts, alleging that it was done artificially to show profitability in AE-related services and losses in other business segments. The TPO's analysis highlighted the interlinking of functions performed by the appellant, leading to the rejection of segmental accounts.

Allocation of Expenses and Basis of Apportionment:
During the TP assessment proceedings, the appellant explained the basis of revenue and expenditure allocation between business segments. The authorities questioned the trustworthiness of segmental accounts due to lack of audit, but the appellant had allocated common expenses and provided a basis for apportionment. The Tribunal found no merit in the authorities' stance and directed the Assessing Officer to delete the adjustment.

Adherence to Principles of Natural Justice:
The appellant raised concerns about the impugned order being contrary to law and facts, lacking adequate hearing opportunities, and disregarding principles of natural justice. The Tribunal considered relevant documentary evidence, judicial decisions, and arguments from both sides before reaching its decision.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the impugned adjustment. The judgment emphasized the importance of proper analysis in transfer pricing matters, allocation of expenses based on sound principles, and adherence to natural justice in tax assessments.