2018 (6) TMI 1266 - AT - Income Tax

TPA - selection of MAM - functional comparability - Held that - The assessee in the present case has also applied internal TNMM method of comparison of operating margins for international transactions of purchase of raw material and components from associated enterprises as well as sale of finished goods effected to associated enterprises. On the basis of aforesaid benchmarking, the profitability under the AE segment was 6.31% which was higher than profitability of transactions under third party segment. Accordingly, we hold that no adjustment on account of arm s length price is required to be made in the hands of assessee. The grounds of appeal No.2 to 6 raised by the assessee are thus, allowed. Arm s length price of international transaction of payment made to the associated enterprises for availing IT services at Nil - held that - We hold the international transactions of information technology services availed has to be aggregated with other transactions being intrinsically linked to other international transactions undertaken by the assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, we also reverse the order of TPO in holding that the assessee has not availed any services in view of various documents filed by the assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Eaton China and its certificate that the same has also charged at the same rates as charged to the assessee. In the entirety of the above said facts and circumstances, we reverse the order of TPO / Assessing Officer in taking the value of international transactions of Information Technology Services availed at Nil and delete the adjustment made. Allowing the claim of assessee, the ground of appeal No.8 raised by the assessee is thus, allowed.

Issues Involved:
1. Adjustment to the transfer price proposed by the TPO and upheld by the DRP.
2. Segmentation of the Appellant’s operations into manufacturing and trading segments.
3. Computation of the arm's length price using internal comparables versus external comparables.
4. Selection and rejection of certain external comparables.
5. Application of adjustment on the entire cost base of the relevant segment.
6. Rejection of multiple-year data in transfer pricing analysis.
7. Transfer pricing adjustment for payments made for IT services, determining the arm's length price as "Nil."

Issue-wise Detailed Analysis:

1. Adjustment to the Transfer Price:
The TPO adjusted the transfer price of international transactions entered by the assessee with its associated enterprises, resulting in an upward adjustment of ?4,88,23,152/-. The DRP upheld this adjustment, leading to an assessed income higher than the returned income. The Tribunal found that the TPO's benchmarking using external comparables was inappropriate, and internal TNMM method should have been applied, as the internal margins were higher.

2. Segmentation of Operations:
The TPO segmented the assessee's operations into manufacturing and trading activities, benchmarking them separately. The assessee argued that both activities were interlinked and should not be separated. The Tribunal upheld the assessee's view, noting that internal TNMM method was appropriate for benchmarking the manufacturing segment, as decided in the earlier assessment year 2007-08.

3. Computation of Arm's Length Price:
The assessee contended that the arm's length price should be computed using internal comparables rather than external comparables. The Tribunal agreed, stating that internal comparables have a more direct and closer relationship to the tested transactions. The internal TNMM method showed higher margins for associated enterprises, indicating no need for adjustment.

4. Selection and Rejection of Comparables:
The TPO rejected certain external comparables selected by the assessee and accepted new ones. The Tribunal found the TPO's rejection of internal TNMM method and selection of external comparables inconsistent and unjustified, especially when internal comparables were available and more relevant.

5. Application of Adjustment on Entire Cost Base:
The TPO applied the adjustment on the entire cost base of the relevant segment. The Tribunal found this approach incorrect, as the internal TNMM method indicated that the profitability from transactions with associated enterprises was higher than with third parties, negating the need for such an adjustment.

6. Rejection of Multiple-Year Data:
The TPO rejected the use of multiple-year data in the transfer pricing analysis. The Tribunal did not find merit in this rejection, as the internal TNMM method, which was based on multiple-year data, was more appropriate and showed higher margins for associated enterprises.

7. Transfer Pricing Adjustment for IT Services:
The TPO determined the arm's length price of IT services availed from associated enterprises as "Nil," citing lack of evidence for services rendered and benefit derived. The Tribunal disagreed, stating that the TPO's role is to determine the arm's length price, not to question the commercial wisdom of the assessee. The Tribunal noted that the assessee provided sufficient evidence, including agreements, certificates, and internal documentation, proving the receipt and benefit of IT services. Consequently, the Tribunal reversed the TPO's adjustment and accepted the assessee's claim.

Conclusion:
The Tribunal allowed the appeal partly, holding that the internal TNMM method was appropriate for benchmarking the international transactions, negating the need for adjustments proposed by the TPO. The Tribunal also reversed the adjustment for IT services, recognizing the evidence provided by the assessee. The appeal was thus partly allowed, providing relief to the assessee.

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