2021 (11) TMI 1101 - AT - Income Tax

Tribunal directs internal TNMM adoption for ITeS benchmarking, upholds treatment of overdue receivables. Rejection of external TNMM.

Majorel India Pvt. Ltd. (“Company”) (earlier known as Bertelsmann Marketing Services India Pvt. Ltd.) Versus ACIT Circle 4 (2) New Delhi

The appeal was partly allowed, with the Tribunal directing the adoption of internal Transactional Net Margin Method (TNMM) for benchmarking provision of ... TP Adjustment - selection of MAM - addition to the returned income of the appellant by re-computing the arm's length price (ALP) of the international transactions under section 92 - rejection of internal TNMM applied by the assessee - HELD THAT:- DRP was not correct in considering the services/scope of work from the agreement entered into by the assessee with its AE for ‘procurement of IT Services’ and comparing the same with the back-end ITeS Services provided by the assessee to AEs. In the present case best suited method is that of internal TNMM. The financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, therefore, it will be appropriate to apply internal benchmarking analysis over external benchmarking analysis. This finds support from the “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” which highlight the preference of internal comparables over external comparables. In fact, the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision of ITeS. Ground Nos. 4 and 5 are allowed. Adjustment on account of notional interest on receivables - HELD THAT:- It is pertinent to note that the assessee is admitting that the business model of the assessee is such that receivables as well as payables are generally outstanding with both the AEs and non AEs for a period exceeding one month. But the contention of the Ld. AR that this is purely because of business reasons and it was not with an intention to extent indirect credit facility to the debts or obtain credit facility from creditors is not sustainable. Hence, we find that the DRP has rightly directed the TPO to compute the adjustment applying the rate of LIBOR plus 400 basis points on receivables due from its AE in US$ for the year under consideration. There is no need to interfere with the said directions. Hence, Ground No. 9 and 10 are dismissed. Issues Involved:1. Addition of Rs. 1,57,59,899 to the returned income by re-computing the arm's length price (ALP) of international transactions.2. Jurisdictional error in the reference made by the AO to the TPO.3. Non-satisfaction of conditions set out in section 92C(3) of the Act.4. Rejection of Internal Transactional Net Margin Method (TNMM) and application of external TNMM.5. Rejection of segmental accounts maintained by the appellant.6. Application of external TNMM by rejecting economic analysis, quantitative filters, and accepting non-comparable companies.7. Classification of the appellant as a Knowledge Process Outsourcing (KPO) company.8. Disregard for multiple year data and selection of current year data for comparability.9. Treatment of overdue receivables from AEs as an international transaction.10. Methodology to compute the ALP of international transaction of receivables.11. Initiation of penalty proceedings u/s 271 (1) (c) of the Act.Detailed Analysis:1. Addition of Rs. 1,57,59,899 to the Returned Income:The appellant contested the addition made by re-computing the ALP of international transactions. The TPO made an upward transfer pricing adjustment of Rs. 8,65,80,474, which was later reduced by the DRP to Rs. 1,57,59,899. The AO incorporated this addition in the assessment order dated 28.10.2016.2. Jurisdictional Error in Reference to TPO:The appellant argued that the AO did not record any reasons in the assessment order for referring the matter to the TPO, as required under section 92CA(1) of the Act. This was claimed to be a jurisdictional error.3. Non-Satisfaction of Conditions in Section 92C(3):The appellant claimed that the DRP/AO/TPO did not appreciate that the conditions set out in section 92C(3) of the Act were not satisfied in this case.4. Rejection of Internal TNMM and Application of External TNMM:The appellant applied internal TNMM comparing the OP/OC margin of AE with non-AE segments, concluding that the international transactions were at arm's length. The TPO rejected this and applied external TNMM. The Tribunal found that the nature of services rendered to AEs and non-AEs were fundamentally the same, and the rejection of internal TNMM was not valid. The Tribunal directed the TPO/AO to adopt internal TNMM for benchmarking.5. Rejection of Segmental Accounts:The DRP/TPO rejected the segmental accounts maintained by the appellant, stating they were not audited and created artificial segmentation. The Tribunal found no discrepancy in the segmental analysis and held that segments do not have to be audited. Therefore, the rejection was not valid.6. Application of External TNMM:The appellant argued that the TPO/DRP erred in rejecting the economic analysis and quantitative filters selected by the appellant and accepting non-comparable companies. Since the Tribunal allowed internal TNMM, these grounds became infructuous and were dismissed.7. Classification as KPO Company:The appellant contested the classification as a KPO company, arguing that the services provided were different from high-end KPO services. This issue was not separately adjudicated as internal TNMM was accepted.8. Disregard for Multiple Year Data:The appellant argued that the DRP/AO/TPO erred in selecting the current year data for comparability instead of multiple year data. This issue was not separately adjudicated as internal TNMM was accepted.9. Treatment of Overdue Receivables:The TPO treated delay in receipts from AEs as unsecured loans and applied an interest rate, making an adjustment. The DRP directed to apply LIBOR + 400 basis points, reducing the adjustment. The Tribunal upheld this direction, finding no need to interfere.10. Methodology to Compute ALP of Receivables:The appellant argued that the methodology to compute ALP of receivables was incorrect. The Tribunal upheld the DRP's direction to apply LIBOR + 400 basis points.11. Initiation of Penalty Proceedings:The appellant argued that the penalty proceedings u/s 271 (1) (c) were initiated mechanically without adequate satisfaction. This ground was noted as consequential and not adjudicated at this juncture.Conclusion:The appeal was partly allowed, with the Tribunal directing the adoption of internal TNMM for benchmarking provision of ITeS and upholding the DRP's direction on the treatment of overdue receivables. Other grounds became infructuous or were not adjudicated.