2019 (4) TMI 1476 - AT - Income Tax

International transaction u/s 92CA(3) - ALP of international transaction as determined by TPO - Selection of comparable - HELD THAT - On both the counts, segmental results of the associated segment are better than Non-AE segment, and internal benchmarking analysis under the segmental results prepared using the valid allocation key is justified. On careful analysis of the decision of the CIT(A) we find that he has given a valid reasons for accepting the segmental results. There is an answer in the order of the learned CIT(A) which cannot be dislodged without having any factual infirmity in the same. On reading the transfer pricing study report prepared by the assessee, it is mentioned that assessee incurred marketing expenses only for procuring business from Non AE customers without giving any finding that such is not the fact the factual statement cannot be ignored. Further, TPO also did not state what is the difference between the functions performed, assets deployed and risk assumed by the assessee in its transactions with AE and Non-AE customers. The TP Study report of the assessee states that ther is no such functional dissimilarity. Same is also the finding of ld CIT(A) which is also not controverted before us. Regarding allocation keys adopted by assessee, ld TPO has not stated that how same are incorrect. Therefore, there is no infirmity in the order of the learned CIT(A) we confirm the same. Appeal of revenue dismissed. Appeals of subsequent years are also dismissed being identical to the facts.

Issues Involved:
1. Deletion of addition on account of Arm’s Length Price (ALP) of international transactions.
2. Acceptance of internal Transactional Net Margin Method (TNMM) benchmarking.
3. Rejection of comparables selected by Transfer Pricing Officer (TPO).
4. Allocation of marketing and business development expenses.
5. Application of OECD guidelines and internal comparables.
6. Rejection of segmentation and allocation keys used by the assessee.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of ALP of International Transactions:
The primary issue across all appeals was the deletion of additions made by the Assessing Officer (AO) on account of the ALP of international transactions determined by the TPO. The AO challenged the deletion of ?4,46,29,132/- for AY 2007-08, ?7,52,66,923/- for AY 2008-09, ?3,07,73,768/- for AY 2009-10, and ?5,50,72,979/- for AY 2010-11. The Tribunal upheld the CIT(A)'s decision to delete these additions, finding that the CIT(A) provided valid reasons for accepting the internal segmentation and benchmarking analysis provided by the assessee.

2. Acceptance of Internal TNMM Benchmarking:
The Tribunal agreed with the CIT(A) that internal TNMM benchmarking was appropriate. The CIT(A) relied on OECD guidelines and previous judicial decisions, emphasizing that internal comparables should be preferred if they are available and reliable. The Tribunal found no factual infirmity in the CIT(A)'s acceptance of the internal TNMM, noting that the TPO did not adequately demonstrate why the internal comparables were unreliable.

3. Rejection of Comparables Selected by TPO:
The TPO's selection of comparables was contested by the assessee, which argued that the comparables were not functionally similar. The CIT(A) rejected most of the comparables selected by the TPO, and the Tribunal upheld this decision. The Tribunal noted that the TPO failed to provide sufficient reasons for rejecting the internal comparables and did not adequately address the differences in functions, assets, and risks (FAR) between the selected comparables and the assessee.

4. Allocation of Marketing and Business Development Expenses:
The Tribunal upheld the CIT(A)'s acceptance of the assessee's allocation of marketing and business development expenses to the non-AE segment. The CIT(A) found that the assessee did not incur such expenses for AE transactions but did so for non-AE transactions. This allocation was deemed reasonable and was based on actual expenses and turnover.

5. Application of OECD Guidelines and Internal Comparables:
The CIT(A) applied OECD guidelines, which suggest a preference for internal comparables. The Tribunal concurred with this approach, noting that the CIT(A) provided a detailed analysis and valid reasons for accepting the internal comparables. The Tribunal found that the TPO did not sufficiently demonstrate that the economic scenarios of the controlled and uncontrolled transactions were different.

6. Rejection of Segmentation and Allocation Keys Used by the Assessee:
The TPO rejected the segmentation and allocation keys used by the assessee, arguing that they were inappropriate. However, the CIT(A) and the Tribunal found that the segmentation was based on actual expenses and turnover and that the TPO did not provide a clear rationale for rejecting these allocation keys. The Tribunal upheld the CIT(A)'s acceptance of the segmentation and allocation keys used by the assessee.

Conclusion:
The Tribunal dismissed all four appeals filed by the AO for the assessment years 2007-08, 2008-09, 2009-10, and 2010-11. The Tribunal upheld the CIT(A)'s decisions, which were based on a thorough analysis of the facts, the application of OECD guidelines, and the acceptance of internal TNMM benchmarking and segmentation provided by the assessee. The Tribunal found no factual or legal infirmities in the CIT(A)'s orders and confirmed the deletion of the additions made by the AO on account of the ALP of international transactions.

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