2014 (1) TMI 1801 - AT - Income Tax

Transfer Pricing Tribunal Decision: Upheld TNMM, Excluded Non-AE Turnover, Directed Adjustments

M/s Saven Technologies Ltd., Versus ACIT, Cir-3 (1), Hyderabad

The tribunal upheld the Transfer Pricing Officer's selection of the Transactional Net Margin Method over the Cost Plus Method, rejected certain ... TPA - ALP determination - selection of TNMM as the most appropriate method as against CPM adopted by the assessee - Held that:- Therefore considering the fact that the assessee itself in the TP study has offered TNMM as an alternative method for computing the ALP, it should not have any grievance if the TPO adopts TNMM as the most appropriate method for determining the ALP. The decisions relied upon by the assessee in this regard will not apply to the facts of the present case as the assessee itself in the TP study has offered TNMM as an alternative method. We are therefore not inclined to entertain the grounds raised by the assessee on this issue. Selection/rejection of certain comparables - Held that:- The assessee is engaged in contract programming which otherwise is known as ‘body shopping’, thus companies functionally dissimilar with that of assessee need to be dropped from final list of comparable. Whether there is no requirement for transfer pricing adjustment as the assessee is claiming exemption u/s 10B - Held that:- As decided in DCIT V/s. Hellosoft India Pvt. Ltd. [2013 (10) TMI 747 - ITAT HYDERABAD] Arms length price is nothing but a fair price which would have been normal price. There is always a possibility of transaction between a nonresident and its associates being under valued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arms length price, will not be opened to question and is within the legislative competence to effectuate the charge of taxing real income in India. Once the benefit is exhausted, the assessee would be liable for taxation in which case, the German tax rate may be more attractive. If the pricing for the exempted years is accepted without analysis there is every chance that the assessing authority might be estopped, on the doctrine of consistency, from examining the pricing for the subsequent non-exempted years. This is quite uncalled for. See M/s SAP Labs India Pvt. Limited V/s. ACIT [2010 (8) TMI 676 - ITAT, BANGALORE] - Decided against assessee. Calculation of ALP on the total turnover which includes non AE turnover - Held that:- Transfer pricing provision apply to the determination of ALP in respect of controlled transactions between related parties. Therefore, un-controlled transactions with third parties who have no relationship with the assessee cannot be considered for transfer pricing adjustment. We therefore direct the Assessing Officer /TPO to verify this aspect and exclude the turnover relating to non AE for determining ALP. Exclusion of VISA processing charges and relocation charges from export turnover without deducting the same from the total turnover while computing deduction u/s 10B - Held that:- We direct the Assessing Officer to exclude VISA charges and relocation charges from the export turnover as well as total turnover while computing deduction u/s 10B of the Act. Issues Involved:1. Selection of the most appropriate method for determining the Arm's Length Price (ALP).2. Selection/Rejection of comparables by the Transfer Pricing Officer (TPO).3. Transfer pricing adjustment applicability despite claiming exemption under Section 10B.4. Calculation of ALP on total turnover including non-AE turnover.5. Exclusion of VISA processing charges and relocation charges from export turnover while computing deduction under Section 10B.Detailed Analysis:1. Selection of the Most Appropriate Method for Determining the ALP:The assessee objected to the selection of the Transactional Net Margin Method (TNMM) by the TPO as the most appropriate method, arguing that the Cost Plus Method (CPM) was more suitable due to available internal comparables. The assessee cited OECD guidelines and previous ITAT decisions to support their stance. However, the tribunal noted that the assessee itself had offered TNMM as an alternative method in its Transfer Pricing (TP) study and had not seriously objected to its adoption during proceedings. Consequently, the tribunal upheld the TPO's selection of TNMM, rejecting the assessee's grounds on this issue.2. Selection/Rejection of Comparables by the TPO:The assessee raised objections regarding the selection of certain comparables by the TPO, arguing functional dissimilarity and other discrepancies. The tribunal addressed each objection as follows:- Maple e Solution Limited: The tribunal excluded this company from the list of comparables, citing its involvement in fraud and functional dissimilarity, as supported by previous ITAT decisions.- Datamatics Financial Services: The tribunal remitted the issue back to the Assessing Officer (AO) to reconsider the assessee's objections, particularly regarding the company's engagement in multiple business activities and its KPO and BPO operations.- Vishal Information Technologies Limited: The tribunal directed the TPO to verify the company's employee cost and outsourcing activities, as previous ITAT decisions had excluded it due to substantial outsourcing.- Asit C Mehta Financial Services Limited: The tribunal instructed the AO/TPO to verify the company's employee cost and functional dissimilarity, following previous ITAT decisions.- Goldstone Infratec Limited: The tribunal remitted the issue back to the AO/TPO to reconsider the company's functional dissimilarity and the availability of segmental details.- Spanco Limited: The tribunal remitted the issue back to the AO/TPO to reconsider the company's functional dissimilarity, given its involvement in telecom and technology infrastructure services.- R. Systems International Limited: The tribunal directed the AO/TPO to verify the company's financial year ending and product development activities, following previous ITAT decisions.- Flextronics Software Systems Limited: The tribunal remitted the issue back to the AO/TPO to reconsider the company's product development activities and reliance on information obtained under Section 133(6).Additionally, the tribunal addressed the rejection of B2K Corp Pvt. Ltd. by the TPO, remitting the issue back to the AO/TPO to reconsider whether the company was a persistent loss-making entity during its start-up period.3. Transfer Pricing Adjustment Applicability Despite Claiming Exemption Under Section 10B:The assessee argued that no transfer pricing adjustment was required as it claimed exemption under Section 10B, implying no motivation for profit shifting. The tribunal rejected this argument, citing previous judicial pronouncements that transfer pricing provisions apply regardless of tax exemption status, to ensure fair pricing in international transactions.4. Calculation of ALP on Total Turnover Including Non-AE Turnover:The tribunal held that transfer pricing provisions apply only to controlled transactions between related parties. Therefore, un-controlled transactions with third parties should not be considered for transfer pricing adjustment. The tribunal directed the AO/TPO to exclude the turnover relating to non-AE transactions from the ALP determination.5. Exclusion of VISA Processing Charges and Relocation Charges from Export Turnover While Computing Deduction Under Section 10B:The tribunal accepted the assessee's alternative contention that if VISA and relocation charges are excluded from export turnover, they should also be excluded from total turnover for computing deduction under Section 10B. The tribunal directed the AO to make the necessary adjustments accordingly.Conclusion:The appeal was partly allowed, with the tribunal directing the AO/TPO to re-compute the ALP and complete the assessment afresh in accordance with the tribunal's directions. The tribunal's order was pronounced on 10-01-2014.