2022 (12) TMI 420 - AT - Income Tax

Assessee's plea upheld, transfer pricing adjustment deleted. Tribunal favors TNMM over CUP method.

The Tribunal upheld the assessee's plea, deleting the transfer pricing adjustment of Rs. 7,96,36,154 related to processing fees for guarantees issued to ... TP Adjustment - processing fees received on account of guarantees issued to Indian beneficiaries (based on the corresponding back-to-back guarantee provided by the overseas associated enterprises) - HELD THAT:- As respectfully following the order passed by the Co–ordinate Bench of the Tribunal in assessee’s own case cited [2022 (4) TMI 1438 - ITAT MUMBAI] we uphold the plea of the assessee and delete the impugned transfer pricing adjustment. Accordingly grounds no. 1 and 2 raised in assessee’s appeal are allowed. Issues Involved:1. Determination of the arm's length price (ALP) of the international transaction relating to processing fees received on account of guarantees issued to Indian companies based on counter-guarantee from overseas branches.2. Rejecting the Transactional Net Margin Method (TNMM) used by the Appellant and adopting External Comparable Uncontrolled Price (CUP) method as the most appropriate method.3. Reimbursement of expenses to Head Office treated as royalty.4. Erroneous computation of total tax payable.5. Erroneous computation of surcharge and education cess on the income taxable under the provisions of IA treaty.6. Non-grant of taxes deducted at source.7. Erroneous computation of interest under section 234B and 234C of the Act.Issue-wise Detailed Analysis:1. Determination of the Arm's Length Price (ALP):The core issue pertains to the transfer pricing adjustment of Rs. 7,96,36,154, made by the Assessing Officer (AO) based on the directions of the Dispute Resolution Panel (DRP). The adjustment was due to re-computing the ALP of the international transaction relating to processing fees received by the assessee for guarantees issued to Indian beneficiaries, which were backed by counter-guarantees from overseas branches. The assessee argued that it provided low-risk administrative support services, secured by back-to-back guarantees, and thus, the Transactional Net Margin Method (TNMM) was appropriate for benchmarking the transaction.2. Rejecting TNMM and Adopting CUP Method:The AO, following the DRP's directions, rejected the TNMM used by the assessee and adopted the Comparable Uncontrolled Price (CUP) method. The AO collected information under section 133(6) from various banks regarding the commission received for guarantees issued against counter guarantees by foreign banks. The AO concluded that a 1% guarantee fee should be charged, leading to the proposed adjustment. The Tribunal, however, found that the assessee acted merely as a beneficiary bank providing administrative support, and thus, TNMM was more appropriate than CUP due to the lack of comparable data and the minimal risk borne by the assessee.3. Reimbursement of Expenses Treated as Royalty:The AO treated reimbursements made by the assessee to its Head Office (HO) for software customization expenses (Rs. 5,44,09,826) and employee costs (Rs. 33,71,423) as fees for technical services/royalties under Article 12 of the India-Australia Double Taxation Avoidance Agreement (IA Treaty). However, this ground was not pressed by the assessee during the hearing and was dismissed as not pressed.4. Erroneous Computation of Total Tax Payable:The assessee claimed that the AO erred in computing the total tax liability. This ground was general in nature and did not require separate adjudication.5. Erroneous Computation of Surcharge and Education Cess:The AO was alleged to have erroneously levied surcharge and education cess on the income taxable under the IA treaty. This ground was also not pressed by the assessee and was dismissed.6. Non-grant of Taxes Deducted at Source:The assessee contended that the AO did not grant full credit for tax deducted at source under the provisions of the Income-tax Act, 1961. This ground was dismissed as not pressed.7. Erroneous Computation of Interest under Section 234B and 234C:The assessee argued that the AO erred in computing interest under sections 234B and 234C of the Act. The Tribunal noted that this issue was consequential in nature and allowed the ground for statistical purposes.Conclusion:The Tribunal upheld the plea of the assessee regarding the transfer pricing adjustment and deleted the adjustment of Rs. 7,96,36,154. Grounds 1 and 2 were allowed, while grounds 3, 5, and 6 were dismissed as not pressed. Ground 4 required no separate adjudication, and ground 7 was allowed for statistical purposes. The appeal was partly allowed for statistical purposes.