ITAT remits matter for fresh assessment after finding rejection of TNMM and audit report unjustified.

The ITAT allowed the appeal for statistical purposes and remitted the matter to the assessment stage for a fresh examination. The rejection of the internal TNMM and the segmental audit report was found unjustified, directing a fair assessment in accordance with the law.

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Issues:
1. Arm's length price adjustment for provision of software development services
2. Rejection of internal TNMM method by Transfer Pricing Officer
3. Upholding of the Arm's Length Adjustment by Dispute Resolution Panel
4. Rejection of segmental audit report by TPO
5. Appeal against Assessing Officer's decision on depreciation

Analysis:

Issue 1: Arm's length price adjustment for provision of software development services
The appellant challenged the correctness of the arm's length price adjustment (ALP) made by the Assessing Officer for provision of software development services. The Transfer Pricing Officer rejected the Cost Plus Method (CPM) and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO rejected the internal TNMM submitted by the assessee due to shortcomings in the segmental accounts. The Dispute Resolution Panel upheld the ALP adjustment. The ITAT found the reasons for rejecting internal TNMM unconvincing, stating that the disclaimer by the auditor was common practice and did not warrant rejection. The ITAT remitted the matter to the assessment stage for further examination of expense allocation, directing a fair and reasonable assessment in accordance with the law.

Issue 2: Rejection of internal TNMM method by Transfer Pricing Officer
The Transfer Pricing Officer rejected the internal TNMM method submitted by the assessee for benchmarking, citing shortcomings in the segmental accounts provided. The TPO found issues with the authenticity of the segmental audit report and the allocation of expenses, leading to the rejection of internal TNMM. The ITAT disagreed with the rejection, stating that the reasons provided were not convincing and directed a re-examination of the matter at the assessment stage.

Issue 3: Upholding of the Arm's Length Adjustment by Dispute Resolution Panel
The Dispute Resolution Panel upheld the arm's length adjustment made by the Transfer Pricing Officer, rejecting the objections raised by the assessee. The ITAT remitted the matter to the assessment stage for further examination, finding the rejection of internal TNMM unjustified.

Issue 4: Rejection of segmental audit report by Transfer Pricing Officer
The Transfer Pricing Officer rejected the segmental audit report provided by the assessee, citing issues with authenticity and expense allocation. The rejection led to the benchmarking being done at the entity level under TNMM. The ITAT found the rejection unjustified and remitted the matter to the assessment stage for a fair assessment based on proper explanations from the assessee.

Issue 5: Appeal against Assessing Officer's decision on depreciation
The appellant raised a grievance against the Assessing Officer's decision to decline depreciation of a certain amount. However, due to the smallness of the amount, the grievance was not pressed and the appeal was allowed for statistical purposes.

In conclusion, the ITAT allowed the appeal for statistical purposes and remitted the matter to the assessment stage for a fresh examination in light of the observations made regarding the rejection of internal TNMM and the segmental audit report.

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