ITAT Mumbai: Partial win for assessee in Transfer Pricing & Non-Transfer Pricing Adjustments

The ITAT Mumbai partially allowed the assessee's appeal for Assessment Year 2006-07 regarding Transfer Pricing Adjustment and Non-Transfer Pricing Adjustment. The Tribunal directed the exclusion of 4 comparable entities in Transfer Pricing Adjustment to align mean margins within the tolerance range, based on various Tribunal decisions supporting their exclusion due to different business models. In Non-Transfer Pricing Adjustment, the Tribunal deleted the adhoc disallowance of 20% of communication expenses, following a previous decision in the assessee's favor. The appeal was partly allowed, with the levy of interest and initiation of penalty proceedings deemed mandatory and premature respectively.

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Issues:
1. Transfer Pricing Adjustment
2. Non-Transfer Pricing Adjustment

Transfer Pricing Adjustment:
The appeal by the assessee for Assessment Year 2006-07 challenges the final assessment order passed by the Assistant Commissioner of Income Tax-10(1), Mumbai, regarding Transfer Pricing Adjustment. The assessee contested the additions on account of Transfer Pricing Adjustment and non-Transfer Pricing adjustments. The assessee focused on excluding 4 comparable entities to bring the mean margins within the tolerance range of +5% as per section 92C(2). The assessee provided research support services to its Associated Enterprise and benchmarked the same using TNMM as the Most Appropriate Method. The TPO proposed a TP adjustment of &8377; 43.22 Lacs, which was confirmed by the DRP. The assessee appealed for the exclusion of the 4 entities based on various Tribunal decisions supporting their exclusion due to different business models and functional profiles. The Tribunal directed for the exclusion of these entities, partly allowing the Transfer Pricing Grounds.

Non-Transfer Pricing Adjustment:
The assessee challenged the adhoc disallowance of 20% of communication expenses, which was reimbursed to employees. The AO proposed a 40% disallowance, reduced to 20% by the DRP. The Tribunal, following a previous decision in the assessee's favor for AY 2004-05, deleted the adhoc disallowance of 20% and allowed this ground of appeal. The levy of interest u/s 234 and initiation of penalty proceedings were deemed mandatory and premature respectively, not requiring adjudication. The appeal was partly allowed based on the Tribunal's orders.

This judgment by the ITAT Mumbai addressed the issues of Transfer Pricing Adjustment and Non-Transfer Pricing Adjustment for the Assessment Year 2006-07. The Transfer Pricing Grounds focused on excluding 4 comparable entities to align mean margins within the tolerance range. The Tribunal directed for the exclusion of these entities based on various Tribunal decisions supporting the exclusion due to different business models and functional profiles. Regarding Non-Transfer Pricing Adjustment, the Tribunal deleted the adhoc disallowance of 20% of communication expenses, following a previous decision in the assessee's favor. The levy of interest and initiation of penalty proceedings were considered mandatory and premature respectively, not requiring further adjudication. The appeal was partly allowed based on the Tribunal's orders pronounced on 30th July 2019.

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