2017 (6) TMI 129 - AT - Income Tax

TPA - according to the CIT(A), whichever way one looks at it- whether on the basis of CUP or TNMM, the transactions entered into by the assessee are at arms length price. The ALP adjustment was thus deleted - Held that - So far as back to back transactions at the same price are concerned- whether between the AEs or by the AE to the end customer independent enterprise, these are inherently arm s length transactions on the basis of CUP analysis. The distinction drawn by the TPO on the basis of FAR analysis of the enterprise rather than the transaction, which is sought to be justified before us by the learned Departmental Representative, is a distinction without any difference. It is also incorrect to proceed on the basis, as has been doen by the TPO, that when TNMM in puts are available, the application of CUP can be rejected. CUP is not a residuary method. As a matter of fact, when perfect CUP inputs are available- as in this case in respect of back to back transaction, that is the best and inherently most suitable method, as it is a direct method and it hardly leaves any scope for distortion of results by extraneous factors. We reject the plea of the learned Departmental Representative on this point. So far as transaction of rendering software development services for US 1,57,739 to Calance US is concerned, we have noted that there is only one comparable available, and that too, as learned Departmental Representative rightly points out, was at an exceptionally lower rate as the assessee was trying to enter a new market. This solitary transaction, according to the learned Departmental Representative, cannot be said to be representative of the commercial transactions of this nature in the US market. Learned counsel for the assessee was also fair enough in not contesting these facts, particularly with respect to a single comparables of small size and in respect of a new market that the assessee was trying to enter, but he did state that even if this CUP input is ignored, there will not be any need of ALP adjustment because the margin on this transaction, when computed correctly, will be comparable with the arm s length margin computed by the TPO. However, we have noted that this aspect of the matter has not been dealt with by the CIT(A) in sufficient detail, by way of a speaking order, and all that the CIT(A) has stated that the total costs of software development comes to ₹ 2,40,57,988. We, therefore, consider it appropriate to remit this limited aspect of the matter for the verification by the TPO.

Summary

Issues:
1. Arm's Length Price adjustment under section 92CA(3)
2. Application of Comparable Uncontrolled Price (CUP) method
3. Treatment of back to back transactions and direct software development services
4. Selection and application of Transfer Pricing methods

Analysis:

Issue 1: Arm's Length Price adjustment under section 92CA(3)
The appeal challenged the deletion of the addition made on account of Arm's Length Price under section 92CA(3) amounting to ?52,57,418. The CIT(A) had deleted the adjustment, considering the CUP method as the most appropriate method for benchmarking the transactions. The CIT(A) observed that the transactions were at arm's length price, and the ALP adjustment was thus deleted. The Assessing Officer appealed against this decision.

Issue 2: Application of Comparable Uncontrolled Price (CUP) method
The grievance raised by the appellant included the application of the CUP method for international transactions. The TPO rejected the CUP method, stating that the functions of the assessee and the associated enterprise were different. The TPO adopted the TNMM method for benchmarking the transactions, resulting in an ALP adjustment. However, the CIT(A) found the CUP method reasonable, especially given the modest turnover of the assessee. The CIT(A) noted that the transactions were at arm's length price, and thus, the ALP adjustment was deleted.

Issue 3: Treatment of back to back transactions and direct software development services
The back to back transactions and direct software development services were analyzed concerning the application of the CUP method. The Tribunal found that back to back transactions at the same price should be considered arm's length transactions based on CUP analysis. The Tribunal rejected the TPO's distinction based on FAR analysis, emphasizing the transaction's similarity. However, for the direct software development services, the Tribunal remitted the matter for further verification by the TPO to ensure correct computation of margins.

Issue 4: Selection and application of Transfer Pricing methods
The selection and application of Transfer Pricing methods were crucial in determining the arm's length price adjustments. The Tribunal emphasized the importance of using perfect CUP inputs when available, especially for back to back transactions. The Tribunal disagreed with the TPO's rejection of the CUP method and remitted the matter for further verification in specific instances. The Tribunal allowed the appeal for statistical purposes, restoring the matter for verification and fresh adjudication in certain aspects.