2023 (3) TMI 254 - AT - Income Tax

TP Adjustment - International transactions with its AEs for providing software consultancy services - Selection of MAM - CUP method OR TNMM - HELD THAT - There is no reason for the TPO to reject CUP method selected by the assessee to bench mark international transactions with its AEs when the assessee was consistently following said CUP method. Further, the assessee has filed comparable transactions of third party sales and proved that margin earned from AE transactions is higher than the margin earned from non-AE transactions. It is a well settled principle of law by the decision of the Hon ble Supreme Court in the case of Radhasaomi Satsang 1991 (11) TMI 2 - SUPREME COURT that although, res judicata is not applicable to Income Tax proceedings, but rule of consistency needs to be followed unless there is a change in facts and circumstances which requires to be considered a different approach or method for considering any issue. As here is no change in the facts and circumstances of the case for the impugned assessment year when compared to previous two years and thus, TPO ought to have followed CUP method selected by the assessee for benchmarking international transactions with its AEs. DRP without appreciating the above facts, has simply upheld TNMM as most appropriate method and upheld the TP adjustment as suggested by the TPO. Hence, we reverse the findings of the DRP and direct the TPO to consider CUP as most appropriate method to bench mark international transactions with its AEs. Accordingly, we direct the TPO to delete the addition made towards TP adjustment made towards AE sales. TP adjustment towards corporate guarantee - assessee company has given a corporate guarantee for the foreign currency loan of US from Axis Bank, Hong Kong to its AE XIUS holdings USA and computed guarantee commission @1% on total corporate guarantee given by the assessee to its AE and has made adjustment - HELD THAT - We find that after amendment of definition of international transaction, corporate guarantee given by any entity to its AE falls under the definition of international transactions in terms of sec.92B of the Act and thus, any corporate guarantee given by the assessee to its AE is an international transaction, which needs to be bench marked. When it comes to rate, at which, such guarantee commission needs to be benchmarked, then bank guarantee given by the commercial banks cannot be a yardstick to apply to corporate guarantees given by an entity. Further, the guarantee commission rate is depending upon the facts of each case and the risk involved in the transactions between the assessee and its AE - As following the decision of the Hon ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT we direct the TPO to benchmark corporate guarantee fees @ 0.5% on total corporate guarantee given by the assessee to its AE. Appeal filed by the assessee is partly allowed.

Issues Involved:
1. Upward adjustment in Arm's Length Price (ALP).
2. Rejection of Comparable Uncontrolled Price (CUP) method.
3. Application of Transaction Net Margin Method (TNMM).
4. Upward adjustment on Corporate Guarantee.
5. Disclosure of standard filters and computation methods by AO/DRP.
6. Selection of comparable companies.
7. Enhancement of adjustment without basis and reasoning.
8. Applicability of section 92B regarding transfer pricing.

Detailed Analysis:

1. Upward Adjustment in Arm's Length Price (ALP):
The assessee contested the upward adjustment of Rs. 4,40,89,432/- made by the AO/DRP on the grounds that the CUP method was consistently applied and accepted in previous years. The AO/DRP's rejection of the CUP method was not justified as there was no change in the facts and circumstances of the case. The Tribunal found that the TPO did not provide credible reasons for rejecting the CUP method and upheld the assessee's use of the CUP method for benchmarking international transactions.

2. Rejection of Comparable Uncontrolled Price (CUP) Method:
The AO/DRP rejected the CUP method on the grounds that the assessee failed to furnish necessary details matching one-to-one price with quantity and quality of services. The Tribunal noted that the CUP method was accepted in previous years and there was no significant change in the facts. Therefore, the Tribunal directed the TPO to consider the CUP method as the most appropriate method for benchmarking international transactions.

3. Application of Transaction Net Margin Method (TNMM):
The AO/DRP's selection of TNMM as the most appropriate method was challenged by the assessee. The Tribunal found that the TPO's rejection of the CUP method was unfounded and that the CUP method was consistently followed by the assessee in previous years. The Tribunal directed the TPO to delete the addition made towards TP adjustment and uphold the CUP method.

4. Upward Adjustment on Corporate Guarantee:
The AO computed a guarantee commission @1% on the total corporate guarantee given by the assessee to its AE, resulting in an adjustment of Rs. 58,80,000/-. The Tribunal held that corporate guarantees fall under the definition of international transactions as per section 92B of the Act. However, the Tribunal directed the TPO to benchmark the corporate guarantee fees @ 0.5%, following the precedent set by the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd.

5. Disclosure of Standard Filters and Computation Methods by AO/DRP:
The assessee argued that the AO/DRP failed to disclose the standard filters used for choosing comparables under TNMM and the arithmetical computation of determining the PLI. The Tribunal did not find specific details on this issue but upheld the CUP method, rendering this point less relevant.

6. Selection of Comparable Companies:
The assessee challenged the selection of companies such as Larsen & Toubro Infotech Ltd, Mindtree Ltd, and Persistent Systems Ltd as comparables due to their significantly higher turnover. The Tribunal's decision to uphold the CUP method over TNMM addressed this concern indirectly.

7. Enhancement of Adjustment Without Basis and Reasoning:
The assessee contended that the AO/DRP enhanced the adjustment without basis and reasoning. The Tribunal's direction to uphold the CUP method and delete the TP adjustment addressed this issue.

8. Applicability of Section 92B Regarding Transfer Pricing:
The assessee argued that the AO/DRP ignored the basic condition of section 92B, which requires that transfer pricing provisions should have a bearing on the profits, income, losses, or assets of such enterprises. The Tribunal's decision to benchmark the corporate guarantee fees @ 0.5% addressed the applicability of section 92B.

Conclusion:
The Tribunal directed the TPO to consider the CUP method as the most appropriate method for benchmarking international transactions and delete the addition made towards TP adjustment. Additionally, the Tribunal directed the TPO to benchmark the corporate guarantee fees @ 0.5% on the total corporate guarantee given by the assessee to its AE. The appeal filed by the assessee was partly allowed.

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