ITAT allows appeal on transfer pricing, rejects 10% ad hoc addition

The ITAT partly allowed the appeal of the assessee, dismissing grounds related to the applicability of provisions of Specified Domestic Transaction and the reference to the Transfer Pricing Officer. The ITAT concluded that the 10% ad hoc addition made by the DRP on transfer pricing adjustment lacked justification as it was not supported by prescribed methods or benchmarking. The order was pronounced on 10th January 2020.

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Issues Involved:
1. Payment of placement charges
2. Applicability of provisions of Specified Domestic Transaction under Section 92BA(i)
3. Reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act

Detailed Analysis:

1. Payment of Placement Charges:
The crux of the issue revolves around the decision of the Dispute Resolution Panel (DRP) for upholding 10% of the ad hoc addition made on account of income distributed for the services rendered for marketing of channel placement rights. The assessee company operates as a "multi-system operator" (MSO) in the distribution of television channels and internet services. The company and its Related Parties (RPs) negotiate and settle with broadcasters for placement charges, which are shared based on their subscriber base. The TPO did not accept the proportional allocation system, arguing that the benchmarking was ad hoc and did not justify the allocation. The TPO determined the Arm's Length Price (ALP) of placement charges at 50% of the amount and directed an adjustment of Rs. 34,80,05,601/-. The DRP restricted the ad hoc addition to 10%, noting that the assessee performed more functions, including negotiating for RPs, but each RP also took its own risks and deployed its own capital. The ITAT found no merit in the DRP's action for upholding the 10% ad hoc addition, noting that the adjustment was made without following any prescribed methods under Section 92C(1) of the Act or any benchmarking.

2. Applicability of Provisions of Specified Domestic Transaction:
The assessee argued that the provisions of Section 92BA(i) were omitted and not repealed by the Finance Act 2017. This issue was not pressed further by the assessee's representative during the hearing, and thus, the ITAT dismissed this ground as not pressed.

3. Reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Act:
The assessee contended that the AO erred in making a reference to the TPO by mechanically following the directions of the Principal Commissioner of Income Tax under Section 263 of the Act, which is not mandated by Section 92CA. The assessee also argued that the AO did not demonstrate the motive of the appellant to reduce taxable profits by manipulating prices of Specified Domestic Transactions. These grounds were also not pressed by the assessee's representative during the hearing, leading the ITAT to dismiss them as not pressed.

Conclusion:
The ITAT concluded that there was no justification for upholding any ad hoc addition of 10% under transfer pricing adjustment, as the DRP's findings were not supported by any prescribed methods or benchmarking. The appeal of the assessee was partly allowed, with the ITAT dismissing the other grounds as not pressed. The order was pronounced in the open court on 10th January 2020.

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