2015 (7) TMI 530 - AT - Income Tax

Transfer pricing adjustment - Not applying TNMM to the internal uncontrolled transactions of the company for determining the ALP - Held that - It is a fact on record, assessee during the year has provided software development services to both AE and Non-AEs. There is no dispute to the fact that assessee in its TP documentation has undertaken an analysis by applying internal TNMM. The TPO in his order also accepts this fact. It is also the plea of assessee that as it has maintained segmental details with regard to the transactions made with AE as well as transactions made with non-AEs during the relevant period and has also maintained relevant record indicating segmental details with regard to both the transactions, then, as per rule 10B(3) internal comparables have to be given preference as price charged by assessee for controlled transactions with AEs can be compared with similar uncontrolled transactions with third parties. On examining relevant statutory provisions, we find merit in the submissions of ld. AR. As the assessee during the year has undertaken transactions with both AEs and non-AEs, and as claimed, has not only maintained segmental details of such transactions, but, has also undertaken comparative analysis in its TP study, it has to be looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. Even the DRP has also not properly appreciated assessee s contention in this regard. As far as observation of the DRP that uncontrolled transactions constitute merely 21.4% amounting to ₹ 44 crores as against huge volume of transactions with AE, therefore, it cannot be compared, we are of the view that claim of assessee cannot be rejected on such general observations. Before rejecting assessee s analyzation under internal TNMM, departmental authorities are required to assign cogent reasons for not accepting the same. Only because volume of transaction is small or insignificant, on that ground alone it cannot be rejected.Since the matter has not been properly enquired into or examined ether by TPO or DRP, we are inclined to remit the issue to the file of TPO for examining afresh after due opportunity of being heard to assessee. TPO must make an endeavour to examine segmental details and find out whether internal transactions/comparables can form the basis of determination of ALP. - Decided in favour of assessee for statistical purposes. Not allowing credit of TDS - Held that - Though, application u/s 154 has been filed by assessee AO has not dealt with the same. Considering the nature of dispute, we direct AO to verify the facts relating to the claim of TDS and if the online statement show credit of the aforesaid TDS in the name of assessee, the same may be allowed.Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Transfer Pricing (TP) Issues
2. Application of Transactional Net Margin Method (TNMM)
3. Determination of Arm's Length Price (ALP)
4. Comparables Selection
5. Negative Working Capital Adjustment
6. Risk Adjustment
7. Credit of Tax Deducted at Source (TDS)
8. Initiation of Proceedings under Section 271(1)(c)

Detailed Analysis:

Transfer Pricing (TP) Issues:
The assessee raised 14 grounds in total, with Grounds No. 1 to 12 focusing on TP issues. Ground No. 1 was general and did not require specific adjudication.

Application of Transactional Net Margin Method (TNMM):
Ground No. 2 contested the non-application of TNMM to internal uncontrolled transactions for determining the ALP. The assessee, an IT solutions company, had undertaken a TP study using internal TNMM and external TNMM. The TPO rejected the internal TNMM due to various defects, including the use of multiple-year data and inappropriate filters. The TPO instead conducted a search yielding 17 comparables with an average margin of 22.03%, leading to a TP adjustment of Rs. 20,17,79,718.

Determination of Arm's Length Price (ALP):
The assessee challenged the TPO's determination of ALP before the Dispute Resolution Panel (DRP), arguing that internal TNMM should be preferred if segmental details are available. The DRP rejected this, noting that the assessee did not raise such objections before the TPO and that the non-AE turnover was too small to be considered appropriate comparables.

Comparables Selection:
The assessee maintained that internal comparables should be preferred over external comparables, citing various judicial precedents. The Tribunal agreed, noting that internal comparables generally have a higher degree of comparability. The Tribunal remitted the issue back to the TPO for fresh examination, emphasizing the need to consider segmental details objectively.

Negative Working Capital Adjustment:
The Tribunal directed the TPO to re-examine the issue of negative working capital adjustment if the internal TNMM is not accepted.

Risk Adjustment:
The Tribunal also instructed the TPO to consider the assessee's submissions regarding risk adjustment in case internal TNMM is not accepted.

Credit of Tax Deducted at Source (TDS):
In Ground No. 13, the assessee raised the issue of not allowing credit of TDS amounting to Rs. 10,53,228. The Tribunal directed the AO to verify the facts and allow the TDS credit if it appears in the online statement.

Initiation of Proceedings under Section 271(1)(c):
In Ground No. 14, the assessee challenged the initiation of proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for the TPO to re-examine the application of internal TNMM and related issues. The Tribunal emphasized the need for a detailed and objective analysis of segmental details and comparables.

← Previous Next →