2017 (12) TMI 421 - AT - Income Tax

TPA - MAM Selection - comparability analysis - CUP v/s TNMM - Held that - On a careful perusal and consideration of the TPO s order under Section 92CA of the Act, we find that, as contended by the learned Authorised Representative, the TPO adopted CUP Method in place of TNMM adopted by the assessee without rendering any finding or reasoning as to why TNMM was rejected and CUP Method was adopted. The TPO has merely stated that TNMM is not the appropriate method and that CUP is the appropriate method. We also find that the TPO has adopted certain rates for offshore and on-site work without assigning any reasons as to how these rates are applicable to the assessee s case, which is sine quo non for applying CUP method. We also notice that the TPO has adopted TNMM as the MAM in the subsequent assessment year 2005-06 in the case on hand, as seen from the documents. This, however, cannot be the reason or basis for deciding the MAM in the year under consideration. Taking into consideration the facts and circumstances of the case as discussed from paras 4.1 to 4.8.2 of this order (supra), we deem it appropriate to set aside the orders of the authorities below and remand / restore the entire issue of TP comparability analysis to the file of the TPO/A.O. to decide the matter afresh, including the determination of the MAM and the comparable companies

Issues Involved:
1. Selection of the Most Appropriate Method (MAM) for Transfer Pricing (TP) analysis.
2. Determination of comparable companies for TP analysis.
3. Application of filters and criteria for selecting comparable companies.
4. Adjustments for differences in risks and working capital.
5. Application of +/- 5% range benefit under Section 92C (2) of the Income Tax Act.
6. Authority and scope of the Commissioner of Income Tax (Appeals) [CIT (A)] in setting aside issues for determination.

Detailed Analysis:

1. Selection of the Most Appropriate Method (MAM) for TP Analysis:
The TPO rejected the TNMM adopted by the assessee and instead applied the CUP method without providing adequate reasoning. The CIT (A) struck down the CUP method and directed the TPO to apply TNMM, citing the Hon'ble Apex Court's decision in DIT (International Taxation) Vs. Morgan Stanley & Co. However, the Tribunal found that the CIT (A) erred in comparing the assessee, which provides software development services, with Morgan Stanley, which provides IT Enabled Services (ITES). The Tribunal emphasized the need for a proper TP comparability analysis for each taxpayer and assessment year, rather than merely quoting judicial pronouncements.

2. Determination of Comparable Companies for TP Analysis:
The CIT (A) adopted the set of comparable companies used in the case of Sun Microsystems India P. Ltd. for AY 2002-03 without conducting a fresh FAR analysis, search process, or specifying filters. The Tribunal found this approach arbitrary and stressed the importance of conducting a proper comparability analysis specific to the assessee's case.

3. Application of Filters and Criteria for Selecting Comparable Companies:
The CIT (A) directed the exclusion of companies with turnover exceeding ?200 Crores and those that are functionally dissimilar but did not specify which companies to exclude. The Tribunal noted that this lack of specificity and the failure to provide valid reasons for adopting the set of comparables from another case rendered the CIT (A)'s decision erroneous.

4. Adjustments for Differences in Risks and Working Capital:
The CIT (A) held that no further adjustments were necessary after providing for working capital adjustments. The Tribunal did not specifically address this issue but implied that a proper TP analysis should consider all relevant adjustments.

5. Application of +/- 5% Range Benefit under Section 92C (2):
The assessee contended that the CIT (A) erred in not allowing the benefit of the +/- 5% range. The Tribunal did not specifically adjudicate this issue but remanded the matter for a fresh TP analysis, implying that all relevant provisions should be considered.

6. Authority and Scope of the CIT (A) in Setting Aside Issues for Determination:
The Tribunal found that the CIT (A)'s directions to the TPO/A.O. amounted to setting aside the issues for determination, which is beyond the mandate of Section 251(1)(a) of the Act. The Tribunal emphasized that the CIT (A) should have afforded adequate opportunity to both the TPO and the assessee before making such decisions.

Conclusion:
The Tribunal set aside the orders of the authorities below and remanded the entire issue of TP comparability analysis to the TPO/A.O. for a fresh determination. The Tribunal directed that the assessee be given adequate opportunity to present details and submissions, which should be duly considered by the TPO/A.O. before making decisions. Both the appeals of the assessee and revenue for AY 2002-03 were allowed for statistical purposes.

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