2019 (4) TMI 1305 - AT - Income Tax

TP Adjustment - transactions related to contract revenue from projects - selection of MAM - as contended that the Ld. TPO Ld. DRP erred in adopting the CPM (Most appropriate method) despite the fact that under the identical facts, this Tribunal in earlier years had approved TNMM as most appropriate method - HELD THAT - We find that the method adopted by the TPO was also held to be correct method. The grievance of adopting this method of the assessee firstly is that it has been done with project to project basis not on the average of all projects. As per the assessee, project to project would not give a true picture as each project has its own life cycle. Secondly, it is stated that set off of surplus revenue/profit exceeding the arms length price and from the other projects has not been given while computing the ALP under a transaction by transaction analysis. We find merit into this contention of the assessee that Ld. TPO erred in comparing individual project margins of transaction with A.E. with aggregate margins earned from transactions with non A.E., which is improper as individual margins are being compared with aggregate margins that is impermissible under law, therefore, the impugned order is set aside. The A.O. is therefore directed to re-compute adjustment after comparing the margins of individual transactions with A.E. with individual transactions margins with non A.E. Comparing the individual transactions with A.E. with aggregate transactions with non A.E. would give a distorted picture of margins, hence, ground Nos.1 2 of the assessee s appeal are partly allowed as indicated herein above.

Summary

Issues Involved:
- Assessment years 2012-13 & 2013-14
- Transfer pricing adjustments related to contract revenue from projects
- Dispute Resolution Panel directions
- Method of benchmarking: Transaction Net Margin Method (TNMM) vs. Cost Plus Method (CPM)
- Set off of surplus revenue/profit exceeding the arm’s length price
- Penalty proceedings under section 271(1)(c) of the Act

Analysis:

Assessment Years 2012-13 & 2013-14:
The appeals by the assessee were against the Dispute Resolution Panel's directions related to transfer pricing adjustments for contract revenue from projects. The adjustment made in the assessment year 2012-13 was sustained, while the adjustment for 2013-14 was also challenged. The main contention was regarding the method of benchmarking, with the assessee arguing for the Transaction Net Margin Method (TNMM) over the Cost Plus Method (CPM).

Transfer Pricing Adjustments - Contract Revenue from Projects:
The key issue revolved around the appropriateness of the CPM as the benchmarking method. The assessee argued that the CPM should be applied on an aggregate basis, comparing average gross margins of related party transactions with non-related party transactions. The assessee highlighted the complexities of individual projects and the need for a holistic approach in determining arm's length prices.

Dispute Resolution Panel Directions:
The Ld. DRP's decision was contested by the assessee, emphasizing that the method adopted by the TPO was incorrect, and the internal CPM analysis was not duly considered. The assessee also raised concerns about the failure to allow a set off of surplus revenue/profit when computing the arm's length price under a transaction-by-transaction analysis.

Method of Benchmarking - TNMM vs. CPM:
The disagreement between the parties centered on the choice of benchmarking method. The assessee relied on TNMM and argued against the application of CPM on a project-by-project basis. The Tribunal found merit in the assessee's contentions, directing the A.O. to re-compute adjustments by comparing individual transaction margins with A.E. and non-A.E. projects separately.

Set Off of Surplus Revenue/Profit:
Another significant issue raised was the failure to allow a set off of surplus revenue/profit exceeding the arm's length price from other projects with AEs. The Tribunal acknowledged this argument, highlighting the impermissibility of comparing individual project margins with aggregate margins and directing the A.O. to consider this aspect in the re-computation of adjustments.

Penalty Proceedings under Section 271(1)(c) of the Act:
The grounds for initiating penalty proceedings were deemed premature and dismissed by the Tribunal, as the focus was primarily on the transfer pricing adjustments and methodological discrepancies.

In conclusion, the Tribunal partly allowed the appeals, setting aside the impugned orders and directing the A.O. to re-compute adjustments in line with the provided directions, emphasizing the importance of accurate benchmarking and considerations for surplus revenue/profit set offs in transfer pricing assessments.