Order remitted for fresh arm's-length price determination using internal segmentation; ALP limited to AE transactions

ITAT set aside the AO/TPO and DRP orders and remitted the matter for fresh determination of arm's-length price for international transactions with the associated enterprise. The Tribunal directed the AO/TPO to determine ALP by internal segmentation: compare profitability of the international transactions with unrelated parties after allocating relevant revenues and expenses to each segment, allowing the assessee to place materials and be heard. The Tribunal held ALP adjustment cannot be made on entire turnover including third-party revenue and limited adjustment to transactions between the tested party and the non-resident AE.

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Issues:
1. Rejection of segmentation approach by the Appellant.
2. Direction by DRP to compute ALP adjustment on entire turnover.

Detailed Analysis:

Issue 1: Rejection of Segmentation Approach
The appeal was filed against the order of the Deputy Commissioner of Income Tax for the assessment year 2012-13. The Appellant, a software services company, had entered into international transactions for software development services. The Appellant adopted the TNMM as the most appropriate method with NCP as the PLI. The Appellant presented an internal TNMM analysis based on segmentation of financials between its AE and non-AE segment. The TPO rejected the segmental approach, stating it was prepared after a show cause notice and without separate cost centers. The DRP directed the AO to compute the ALP adjustment on the entire turnover, including revenue from third party customers. The Appellant contended that the rejection of the segmentation approach was erroneous and violated principles of natural justice. The Ld. AR referred to a Delhi Bench decision and a judgment of the Delhi High Court to support the Appellant's argument. The Tribunal set aside the order of the AO/TPO and remitted the issue back for determining the arm's length price.

Issue 2: Direction to Compute ALP Adjustment on Entire Turnover
The DRP directed the AO to compute the ALP adjustment on the entire turnover, including revenue from third party customers. The Tribunal, following a previous case, held that transfer pricing adjustment should only be made in respect of transactions with associated enterprises outside the country. The Tribunal set aside the DRP's order and remitted the issue back to the AO/TPO for proper determination. As a result, the appeal was treated as partly allowed for statistical purposes.

In conclusion, the Tribunal's judgment addressed the issues of rejection of segmentation approach and the direction to compute ALP adjustment comprehensively, setting aside the previous orders and remitting the issues back for proper determination in accordance with the law.

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