2017 (12) TMI 809 - AT - Income Tax

TPA - MAM selection - TNMM application - Held that - TNMM can be correctly applied on entity level if the international transactions are on sale by the taxpayer to its foreign AE and there is no other international transaction of sale to any outsider and also there is no other international transaction. In the instant case, undisputedly, there is no other international transaction. The taxpayer has only minuscule transaction with non-AE, the bifurcation of which has been given. Detail available includes inter alia the name of the employees, the month-wise payment for the work exclusively done for non-AE/domestic enterprises. All these details were available before ld. TPO who has not raised any query. This detail was also available before the DRP but has not been considered in the right perspective. AO/TPO/DRP have erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis. So, by accepting the TNMM as the most appropriate method and in the face of the fact that the taxpayer was having separate international transaction with its AE, the ALP of the same is to be determined whereas ALP of the other transactions of the taxpayer with non-AE is not to be considered. Even otherwise, TP adjustment is not possible without taking into account the segmental result. As such, TPO/DRP cannot unilaterally adopt entity level result in determining the ALP of international transaction. So, in these circumstances, TP adjustment made by the AO/TPO/DRP by taking the margin of the taxpayer at entry level for TP adjustment is not sustainable, so we hereby remand back the case to the TPO to decide afresh after considering segmental result of the taxpayer for TP analysis.

Issues Involved:
1. Transfer Pricing Adjustment
2. Business Model and Segmental Results
3. Rejection of TP Documentation
4. Comparability Analysis and Filters
5. Financial Data Consideration
6. Export Earning Filter
7. Related Party Transactions Filter
8. Turnover Limits for Comparable Companies
9. Acceptance and Rejection of Comparable Companies
10. Risk Adjustment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The taxpayer, CSR Technology (India) Private Limited, challenged the adjustment of INR 2,82,48,956/- determined by the AO/TPO/DRP concerning international transactions under Section 92CA of the Income-tax Act, 1961. The taxpayer contended that the authorities erred in determining this adjustment by ignoring the business model and segmental results, and by considering the margin at the entity level instead of the segmental level.

2. Business Model and Segmental Results:
The taxpayer argued that the TPO disregarded its business model, which differed for AE and non-AE transactions. For AE, a fixed cost plus markup was assured, whereas, for non-AE, there was no assured profit. The TPO rejected the segmental information because the non-AE transactions were minuscule. The Tribunal referred to the Special Bench decision in LG Electronics India Private Limited, which stated that TNMM should be applied at the transactional level, not at the entity level. The Tribunal held that segmental results should be considered even if not audited, as long as they are maintained in the ordinary course of business.

3. Rejection of TP Documentation:
The taxpayer's TP documentation was rejected by the AO/TPO/DRP under Section 92C(3) of the Act. The Tribunal emphasized that segmental results should not be rejected merely because they are not audited, as supported by decisions in Honeywell Electrical Devices & Systems India Ltd. and 3i Infotec Ltd.

4. Comparability Analysis and Filters:
The AO/TPO/DRP conducted a fresh comparability analysis by introducing various filters, which the taxpayer contested. The Tribunal noted that the TPO selected 12 comparables with an average margin of 18.18%, but the taxpayer argued that the comparables should be selected based on the segmental results of AE transactions.

5. Financial Data Consideration:
The taxpayer contended that the authorities erred in not considering the previous two years' financial data of comparable companies. The Tribunal did not delve into this issue in detail, focusing instead on the broader issue of segmental versus entity-level analysis.

6. Export Earning Filter:
The taxpayer argued that the AO/TPO/DRP applied an export earning filter of 75% instead of 25%, leading to a narrower comparable set. The Tribunal's decision did not specifically address this filter but implied that the overall comparability analysis needed reconsideration based on segmental results.

7. Related Party Transactions Filter:
The taxpayer contested the 25% threshold for Related Party Transactions (RPT) filter applied by the authorities. The Tribunal did not specifically address this issue, focusing on the need for a fresh analysis considering segmental results.

8. Turnover Limits for Comparable Companies:
The taxpayer argued that the authorities erred in not applying an upper limit on turnover for selecting comparable companies. The Tribunal emphasized the importance of considering segmental results, which may affect the selection of comparables.

9. Acceptance and Rejection of Comparable Companies:
The taxpayer listed several companies that were either wrongly accepted or rejected as comparables. The Tribunal did not specifically address each company but remanded the case for fresh analysis considering segmental results.

10. Risk Adjustment:
The taxpayer argued that appropriate adjustments for risk differences between the taxpayer and comparable companies were not allowed. The Tribunal's decision implied that such adjustments should be reconsidered in the fresh analysis.

Conclusion:
The Tribunal concluded that the AO/TPO/DRP erred in disregarding the segmental results and considering the margin at the entity level. The Tribunal remanded the case to the TPO for fresh analysis, emphasizing the need to consider segmental results for TP analysis. The appeal was allowed for statistical purposes, and the case was sent back for reconsideration based on the Tribunal's guidelines.

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