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of <h1>ITAT Upholds CIT(A)'s TNMM Decision for ALP, Emphasizes Internal Comparables</h1> <h3>The Assistant Commissioner of Income Tax, Circle 7 (1) (1), Bangalore. Versus M/s. e4e Business Solutions India Pvt. Ltd. And (Vice-Versa)</h3> The Assistant Commissioner of Income Tax, Circle 7 (1) (1), Bangalore. Versus M/s. e4e Business Solutions India Pvt. Ltd. And (Vice-Versa) - TMI Issues Involved:1. Whether the CIT(A) was justified in directing the AO to apply the internal Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) for benchmarking the international transactions entered into by the assessee with its Associated Enterprise (AE).Detailed Analysis:1. Application of Internal TNMM:- Factual Background: The assessee rendered Information Technology enabled Services (ITeS) to its AEs, and the price received had to satisfy the arm's length price (ALP) test under section 92 of the Income-tax Act, 1961. The Transfer Pricing Officer (TPO) selected external comparables to determine the ALP, resulting in an adjustment of Rs. 5,45,74,745 for AY 2004-05 and Rs. 2,98,36,737 for AY 2005-06.- CIT(A) Decision: The CIT(A) accepted the assessee's contention that the internal margin for transactions with non-AEs was 23% for AY 2004-05 and 12.98% for AY 2005-06. The CIT(A) directed the TPO/AO to compute the ALP using the internal TNMM, citing the ITAT's decision in the assessee's own case for AY 2010-11, where internal comparables were preferred over external comparables.- Revenue's Grounds of Appeal: The revenue challenged the CIT(A)'s decision on several grounds, including:- The revenue earned from AEs (international market) and non-AEs (domestic market) cannot be compared.- Differences in geography, functions, assets, risks, labor costs, and legal provisions affect profit margins.- The taxpayer did not report segmental break-up in audited financials, and the internal TNMM was not raised before the TPO during TP proceedings.2. ITAT's Observations:- The ITAT upheld the CIT(A)'s decision to apply the internal TNMM, referencing its own decision in the assessee’s case for AY 2010-11 and the Third Member decision of the Mumbai Bench in the case of M/s. Technimont ICB Pvt. Ltd. The ITAT emphasized that internal comparables have a higher degree of comparability than external comparables due to consistent factors like quality of output, assets employed, and input costs.- Key Judgments Referenced:- Mylan Labs Ltd. Case: The ITAT noted that internal comparables should be preferred when available, as they provide a more accurate reflection of the profits that would have been earned in an uncontrolled transaction.- Technimont ICB Pvt. Ltd. Case: The decision highlighted that internal comparables neutralize the effect of differences due to inherent factors, making them more reliable for determining the ALP.3. Conclusion:- The ITAT dismissed the revenue's appeals and the assessee's cross-objections, affirming the application of internal TNMM as the most appropriate method for determining the ALP. The ITAT noted that the manner of determining the internal margin under the internal TNMM was not questioned, rendering other grounds of appeal purely academic.Final Pronouncement:- The appeals by the revenue and the cross-objections by the assessee were dismissed, with the judgment pronounced in the open court on November 29, 2021.
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