2015 (2) TMI 202 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - CIT(A) upheld the rate per man hour of USD 18 adopted by TPO to be appropriate, however, he held that further adjustment of 5% is to be allowed on account of material differences between assessee and Wipro - Held that - On the earlier occasion while disposing off the appeals of assessee as well as the department, the Tribunal has given a clear direction to TPO to determine the ALP under the CUP method by bringing comparable cases on record. Of course it directed the TPO, as a second option, to adopt the rate charged by assessee in the subsequent FY in case no comparable case is available under the CUP. However, the Tribunal while considering the Miscellaneous Application of assessee 2015 (2) TMI 242 - ITAT HYDERABAD modified the appeal order by deleting direction given to TPO to consider the rate adopted by assessee in the immediate next year. Thus, after the order dated 09/01/2015 passed in M.A., the only option left to AO/TPO for determining ALP is by applying CUP method. As ALP determined by TPO and confirmed by DRP is not under CUP method, the same is invalid. Rule 10B(1)(a) of IT Rules prescribes the method for determination of ALP under CUP. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions and thereafter making necessary adjustments of such price on account of differences between the international transactions and comparable uncontrolled transactions or between the enterprises entering into such transactions which could materially affect the price in the open market, TPO will have to determine ALP. Therefore, unless, comparables are brought on to benchmark the price charged by a particular assessee, it cannot be said that the price charged by assessee is not within the arm s length. However, on a perusal of the order dated 23/05/2013 of the TPO passed in pursuance to the direction of the Tribunal, it is very much clear, TPO has expressed his inability in finding a comparable under CUP method. In these circumstances, there was no other choice left to TPO but to accept the price charged by assessee as ALP. Thus we hold that adjustment made to ALP is not justified. Accordingly, we delete the addition made on that account. - Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Validity of third-party quotations as Comparable Uncontrolled Price (CUP).
3. Appropriateness of Transfer Pricing Officer's (TPO) methodology.
4. Directions of the Tribunal and their implications on the assessment.

Issue-Wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:
The primary issue in this case was the determination of ALP for the services rendered by the assessee to its Associated Enterprises (AE). The assessee, an Indian company engaged in software development, entered into a master contract with its AE at an hourly rate of USD 10 per man hour. The TPO, however, determined that the rate should be USD 18 per man hour based on comparisons with Wipro and the rates charged by the assessee in subsequent financial years. This resulted in an ALP adjustment and an addition of Rs. 4,64,98,586 to the assessee's income.

2. Validity of third-party quotations as Comparable Uncontrolled Price (CUP):
The assessee submitted a quotation from M/s Inspira Technologies P. Ltd. as a CUP, which quoted an initial rate of USD 10 per man hour, increasing to USD 12 per man hour. The TPO rejected this quotation, stating that under rule 10B(1)(a), actual transactions must be considered, not proposed prices. The TPO also noted that rule 10AB, which allows for such quotations, was only effective from AY 2012-13, making the quotation invalid for the assessment year in question.

3. Appropriateness of Transfer Pricing Officer's (TPO) methodology:
The TPO, unable to find a valid comparable under the CUP method, used the rate charged by the assessee in the subsequent financial year (USD 18 per man hour) and adjusted it for inflation to USD 17.31 per man hour. This led to an ALP determination of Rs. 10,00,78,250 and an adjustment of Rs. 4,25,09,332. The Dispute Resolution Panel (DRP) upheld this approach, rejecting the assessee's objections and the validity of the Inspira Technologies quotation.

4. Directions of the Tribunal and their implications on the assessment:
The Tribunal initially directed the TPO to find comparable cases under the CUP method or, failing that, to consider the rate adopted by the assessee in the immediate next year. However, this direction was later modified, removing the alternative option of using the subsequent year's rate. Consequently, the only valid method left was the CUP method. Since the TPO failed to find a valid comparable and the ALP was not determined under the CUP method, the Tribunal held that the adjustment made was not justified and deleted the addition.

Conclusion:
The Tribunal concluded that the TPO's determination of ALP was invalid as it did not adhere to the CUP method, the only method permissible after the modification of the Tribunal's directions. The adjustment of Rs. 4,25,09,332 was deleted, and the appeal was allowed in favor of the assessee. The additional ground raised by the assessee was dismissed as infructuous.