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2023 (3) TMI 1185 - AT - Income TaxTP Adjustment - selection of MAM - TNMM or CUP - HELD THAT - We concur with DRP to hold that comparable transactions with AEs cannot be adopted for benchmarking international transaction using CUP Method as the same do not qualify as uncontrolled transactions. No infirmity in rejecting CUP Method and adoption of TNMM as the most appropriate method for benchmarking international transaction in the facts of the present case. To this extent Ground 1.1 raised in the Appeal is treated as partly allowed. Comparable selection - exclusion of the First Comparable (i.e. Asia Business Exhibition Conferences Ltd.).on account of high turnover - HELD THAT - In the present case no turnover filter has been applied by the TPO or the Appellant while selecting the comparables and therefore the judgment of Acusis Software India (P) Ltd. 2018 (8) TMI 1885 - KARNATAKA HIGH COURT does not apply to the facts of the present case. We also note that it is not the case of the Appellant that First Comparable is functionally dissimilar to the Appellant. We do not find any merit in the contentions raised on behalf of Appellant for exclusion of the First Comparable (i.e. Asia Business Exhibition Conferences Ltd.). Accordingly Ground No. 1.2(b) raised by the Appellant is rejected. Exclusion of Second Comparable Messe Duesseldorf India Pvt. Ltd. - There is nothing placed on record by the Appellant to controvert the concurrent factual findings returned by the TPO and the DRP to the effect that proper information/material about Second Comparable was available. Therefore we do not find any reason to interfere with the exclusion of Second Comparable from the list of comparables. Computing ALP of the international transaction the TPO had applied PLI at entity level and not with reference to international transaction - In view of the above judgment of the Hon ble Bombay High Court in the case of Ratilal Becharlal Sons 2015 (11) TMI 1524 - BOMBAY HIGH COURT and the observations of DRP we direct the Assessing Officer to compute transfer pricing adjustment in respect of international transactions with AE. Accordingly Ground No. 1.3 raised by the Appellant is allowed.
Issues Involved:
1. Adjustment in determination of arm's length price (ALP) of International Transactions amounting to Rs. 5,74,45,969/-. 2. Rejection of Comparable Uncontrolled Price (CUP) method and adoption of Transactional Net Margin Method (TNMM). 3. Inclusion and exclusion of certain comparables in determining ALP. 4. Computation of ALP at entity level versus transaction level. Detailed Analysis: Adjustment in Determination of ALP: The primary issue revolves around the adjustment of Rs. 5,74,45,969/- made by the Transfer Pricing Officer (TPO) in the ALP of international transactions entered into by the Appellant with its Associate Enterprises (AEs). The Dispute Resolution Panel-I, Mumbai (DRP) upheld this adjustment, leading to the addition of this amount to the income of the Appellant. Rejection of CUP Method and Adoption of TNMM: The Appellant had adopted the CUP method for benchmarking its international transactions. However, the TPO rejected this method, arguing that the service agreements used for benchmarking were between controlled entities within the same group, thus not qualifying as uncontrolled transactions. Consequently, the TPO adopted the TNMM with Net Cost plus Margin as the Profit Level Indicator (PLI). The DRP concurred with this decision, rejecting the CUP method and upholding TNMM as the most appropriate method. The Tribunal found no infirmity in this decision and partly allowed Ground 1.1. Inclusion and Exclusion of Comparables: - Inclusion of Asian Business Exhibition & Conference Ltd. (First Comparable): The Appellant contended that this company should be excluded due to its significantly higher turnover compared to the Appellant. However, the Tribunal noted that neither the TPO nor the Appellant had applied any turnover filter. The Tribunal also observed that there was no demonstrated impact of high turnover on profitability. Citing the Karnataka High Court judgment in Acusis Software India (P) Ltd. vs. ITO, the Tribunal found no merit in excluding the First Comparable and rejected Ground 1.2(b). - Exclusion of Messe Duesseldorf India Pvt. Ltd. (Second Comparable): The TPO excluded this company due to incomplete financial data. The DRP upheld this exclusion, noting that only summary financial figures were available, making it impossible to analyze and compare results. The Tribunal found no reason to interfere with this exclusion and rejected Ground 1.2(a). Computation of ALP at Entity Level vs. Transaction Level: The Appellant argued that the TPO erred by applying the PLI margin at the entity level instead of restricting it to international transactions with AEs. The DRP acknowledged the Bombay High Court's judgment in CIT v. Firestone International Pvt Ltd., which favored the Appellant's stance but upheld the TPO's approach to protect the Department's interests. The Tribunal, citing the Bombay High Court's judgment in Commissioner of Income Tax-16, Mumbai vs. Ratilal Becharlal & Sons, directed the Assessing Officer to compute the transfer pricing adjustment only in respect of international transactions with AEs, thus allowing Ground 1.3. Conclusion: The appeal was partly allowed. The Tribunal upheld the adoption of TNMM over CUP, confirmed the inclusion of Asian Business Exhibition & Conference Ltd. as a comparable, and excluded Messe Duesseldorf India Pvt. Ltd. due to incomplete financial data. However, it directed the computation of ALP adjustments to be restricted to international transactions with AEs, aligning with the Bombay High Court's interpretation of Chapter X of the Income Tax Act.
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