2022 (10) TMI 375 - AT - Income Tax

TP Adjustment - Selection of MAM - rejection of internal TNMM applied by the assessee company - HELD THAT - We find that similar issue on similar facts has been decided by the Coordinate Bench of the Tribunal in the case of Majorel India Pvt. Ltd. 2021 (11) TMI 1101 - ITAT DELHI wherein the Tribunal directed the TPO/A.O. to adopt internal TNMM for benchmarking provision of ITes. Thus we direct the TPO/A.O. to adopt internal TNMM for benchmarking provision of ITeS. Accordingly, the grounds of appeal of the assessee company are allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment in international transactions for A.Y. 2013-14.
2. Jurisdictional error in reference to Transfer Pricing Officer (TPO).
3. Application of TNMM for benchmarking international transactions.
4. Rejection of internal TNMM by authorities.
5. Rejection of segmental accounts by authorities.
6. Application of external TNMM and RPT filter.
7. Treatment of overdue receivables as international transactions.
8. Methodology of ALP for alleged international transaction of receivables.
9. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Analysis:

1. The appeal was against the order of the Assistant Commissioner of Income Tax regarding transfer pricing adjustments in international transactions for A.Y. 2013-14. The case involved the assessee company engaged in IT enabled services, with scrutiny initiated due to international transactions with Associated Enterprises (AEs) as per Section 92B of the I.T. Act, 1961. The Transfer Pricing Officer (TPO) determined an ALP adjustment of Rs.60,94,597, which was later reduced to Rs.49,33,499 by the Disputes Resolution Panel (DRP). The final assessment determined the total income at Rs.1,82,24,622 under section 143(3) r.w.s.144C of the I.T. Act, 1961.

2. The grounds of appeal raised various issues including jurisdictional errors in the reference to the TPO, rejection of internal TNMM, segmental accounts, application of external TNMM, RPT filter, treatment of overdue receivables, ALP methodology, and penalty proceedings. The Tribunal dismissed some grounds not pressed during the hearing and found that the issue of adopting internal TNMM was covered by a previous Tribunal decision, directing the TPO/A.O. to adopt internal TNMM for benchmarking provision of IT enabled services.

3. The Tribunal noted that the nature of services rendered by the assessee to AEs and non-AEs broadly comprised customer care and technical support falling under the ITeS Industry. Rejecting the internal TNMM was deemed invalid as it facilitates finding comparable companies and determining the arm's length nature of transactions. The Tribunal directed the TPO/A.O. to adopt internal TNMM based on the reliability and accuracy of financial data pertaining to internal segmentation.

4. As the Tribunal had already accepted the grounds related to internal TNMM, the issues concerning the application of external TNMM and RPT filter were considered infructuous and dismissed. The appeal was partly allowed based on the directions given regarding the adoption of internal TNMM for benchmarking international transactions in the IT enabled services sector.

Conclusion:
The Tribunal's decision highlighted the importance of adopting internal TNMM for benchmarking international transactions in the IT enabled services industry, emphasizing the reliability and accuracy of financial data for such analysis. The judgment provided clarity on the methodology to be applied in transfer pricing assessments, ensuring a fair and reasonable determination of arm's length prices in related party transactions.