2022 (1) TMI 345 - AT - Income Tax

TP Adjustment - ALP determination - international transaction of rendering software services to its AE - rejecting the assessee s allocation of Costs and determination of the PLI from services AE and services non-AE segments - rate charged to AEs and non-AEs was different as was reflected from sample invoices does not justify rejection of the separate determination of operating profit from different segments - HELD THAT - Though the assessee mentioned in its Transfer pricing study report that the purchase of software was considered for benchmarking the Service segment, but the transaction of purchase of software was not taken into consideration at the time of benchmarking the transaction. A mere wrong mention in the Transfer pricing study report about the inclusion of purchase of software does not place the case of the Revenue at a better pedestal when factually the purchase of software was not considered by the assessee for benchmarking. As evident that the reasons ascribed by the authorities below for rejecting the segmental profitability are not tenable. The corollary is that the segmental profitability, as determined by the assessee, was correct, as per which OP/OC from services to AR at 18.04% is better than OP/OC from non-AE services at 13.44% showing the international transaction at ALP. There is another dimension of the case. The assessee rendered similar Services both to the AEs and non-AEs. Even if we ignore the separate segmental profitability and consolidate the service segment consisting of both the AEs and non-AEs as one unit, the combined PLI comes to 14.72%, as has been noted with tabulation in the objection raised by the assessee before the DRP showing OP/OE at 19.04% from services (AEs) and 14.33% from services (non-AEs) and aggregate at 14.72%. As against this combined margin from Services, the mean margin of the comparables taken by the AO in the order giving effect to the DRP s directions, is 13.13%. The assessee s combined margin is also better than that of the comparables, which makes the international transaction at ALP. DRP adduced one more reason that the assessee did not consider purchase of software in the services segment which ought to have been considered, as was initially stated in the Transfer pricing study report. Software products were purchased by the assessee from its AE at ₹ 36.00 lakh and it was sold at ₹ 1.55 crore, thereby giving profit of ₹ 1.19 crore. If this profit is also included in the operating profit of consolidated Service segment, the profit margin so considered earlier will further push up rather than reducing it. Viewed from any angle, it is clear that the international transaction of rendering software services to its AE is at ALP. We, therefore, order to delete the transfer pricing adjustment of ₹ 1.73 crore.

Summary

Issues:
Transfer pricing adjustment of ?1,73,70,067.

Analysis:
1. The only issue in this appeal is the transfer pricing adjustment made by the Assessing Officer (AO) amounting to ?1,73,70,067. The appellant, an Indian Company providing Engineering services, filed a return declaring international transactions. The AO referred the case to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP). The TPO, after rejecting the appellant's allocation of expenses to different segments, applied external TNMM and made a transfer pricing adjustment of ?2,42,37,997. The Dispute Resolution Panel (DRP) altered the comparables, leading to an addition of ?1.73 crore by the AO, against which the appellant appealed before the Tribunal.

2. The Tribunal analyzed the facts of the case, where the appellant provided Engineering Design services to its United States AE, as well as to domestic and European markets, along with engaging in trading activities. The TPO rejected the appellant's bifurcation of costs and PLI determination, stating that expenses were not allocated on an actual basis. However, the Tribunal found that the appellant had computed segmental profits separately and identified revenue from different segments, allocating expenses based on various factors like employee ratio and revenue ratio.

3. The TPO's rejection of the appellant's cost allocation and PLI determination was found to be unjustified by the Tribunal. Even if the appellant charged different rates to AEs and non-AEs, the separate profits should not be rejected. The Tribunal also noted that the DRP's observation regarding the purchase of software products and consultancy services did not hold, as the purchase and sale of software were part of the trading segment, not services. The Tribunal concluded that the segmental profitability determined by the appellant was correct, showing the international transaction at ALP.

4. Additionally, the Tribunal considered the combined profitability of services provided to both AEs and non-AEs, which showed a better margin than the comparables taken by the AO. The inclusion of profit from the sale of software products further supported the conclusion that the international transaction was at ALP. Therefore, the Tribunal ordered the deletion of the transfer pricing adjustment of ?1.73 crore, allowing the appeal.

In conclusion, the Tribunal found that the appellant's segmental profitability determination was correct, and the international transaction of rendering services to its AE was at Arm’s Length Price, leading to the deletion of the transfer pricing adjustment.