2019 (8) TMI 1394 - AT - Income Tax

Tribunal directs Transfer Pricing Officer to reconsider comparables and segmental data for international transactions

The Tribunal allowed the appeal in part, directing the Transfer Pricing Officer (TPO) to exclude certain comparables in the Software Development Segment, ... TP Adjustment - operating margin - market support services - comparable selection - HELD THAT:- cost of marketing team should be bifurcated based on revenue of AE from its operations in India vis a vis revenue generated by the assessee from its sales to third party vendors. We, accordingly, restore this issue to the file of the Assessing Officer/TPO. The assessee is directed to submit the India Specific Profit and Loss Account, network equipment sales to Indian telecom operators of the AE duly certified by an authorised public accountant of Finland. The TPO is directed to examine the same and decide the issue afresh after giving reasonable and sufficient opportunity of being heard to the assessee. TP Adjustment - TSS segment - Warrantee support services - Held that:- the FAR analysis of the year under APA applicable from assessment year 2010-11 can also be used for the year under consideration since the TP adjustment is of a very small amount being 1.01 crores. Considering the facts in totality, we direct the TPO to accept the TSS segment as part of network division for bench marking the international transaction which means that this segment should be taken with the main network division of aggregated approach for bench marking. TP Adjustment - ITES Segment - Remote network Management services - Held that:- even the Legislature accepts that two segments cannot be mixed up, which means that most of the comparables used by the TPO have to be rejected. In all fairness, we deem it fit to restore the matter to the file of the TPO with a direction to use only those comparables which fit in Rule 10TA(e) of the Rules and decide the issue afresh after giving reasonable and fair opportunity of being heard to the assessee. The assessee shall be at liberty to bring any new comparables which fit into Rule 10TA(e) of the Rules. Issues Involved:1. Transfer Pricing Adjustment in Software Development Segment2. Transfer Pricing Adjustment in Marketing Support Services Segment3. Transfer Pricing Adjustment in Technical Support Services Segment4. Transfer Pricing Adjustment in ITES Segment (Remote Network Management Services)Detailed Analysis:1. Transfer Pricing Adjustment in Software Development Segment:The appellant contended that the comparables used by the TPO in the previous assessment year (2008-09) should be excluded for the current assessment year (2009-10) as well. The Tribunal noted that the same comparables were excluded in the previous year due to functional dissimilarity and lack of segmental data. The Tribunal directed the TPO to exclude the following comparables from the final set: CAT Technologies Ltd, Infosys Technologies Ltd, Larsen & Toubro Infotech, LGS Global, Mindtree Ltd, Persistent Systems, R.S. Software, and Tata Elxsi. The Tribunal also considered the inclusion of CG-VAK Software & Exports Limited, remanding the issue back to the TPO for fresh consideration based on past acceptance.2. Transfer Pricing Adjustment in Marketing Support Services Segment:The appellant argued that marketing support services were integral to the main network division and should be aggregated for benchmarking. The TPO had rejected this approach, treating the services as distinct transactions and selecting separate comparables. The Tribunal found merit in the appellant's argument that the AE reimbursed the total marketing cost, including the cost incurred for domestic market support services. The Tribunal directed the TPO to bifurcate the cost based on revenue attribution and to examine the issue afresh with the documentary evidence provided by the appellant.3. Transfer Pricing Adjustment in Technical Support Services Segment:The appellant claimed that technical support services (TSS) were part of the network division and should be benchmarked using an aggregated approach. The TPO had used separate comparables for TSS, leading to an adjustment. The Tribunal considered the Advance Pricing Agreement (APA) applicable from the previous year 2009-10 and directed the TPO to accept the TSS segment as part of the network division, thereby adopting the aggregated approach for benchmarking.4. Transfer Pricing Adjustment in ITES Segment (Remote Network Management Services):The appellant argued that it was a low-end service provider and should not be compared with high-end service providers. The TPO had used comparables that included high-end service providers, leading to a significant adjustment. The Tribunal noted the distinction between ITES and knowledge process outsourcing services as per Rule 10TA(e) of the ITAT Rules. The Tribunal directed the TPO to use only those comparables fitting the definition of ITES under Rule 10TA(e) and to reconsider the issue afresh, allowing the appellant to bring new comparables fitting this rule.Conclusion:The appeal was allowed in part for statistical purposes, with directions for the TPO to reconsider the issues based on the Tribunal's findings and the documentary evidence provided by the appellant. The Tribunal emphasized the need for functional similarity and proper segmental data in selecting comparables for benchmarking international transactions.