Tribunal Upholds 5% Markup Consistency with Guidelines; Grants Deductions & TDS Credits, Overturns Revenue Adjustments.

The Tribunal concluded that the 5% markup policy for IT services rendered by the associated enterprise (AE) was consistent with international guidelines and the EU Joint Transfer Pricing Forum. It directed that no additional expenses beyond the 5% markup be permitted for support services. Furthermore, the Tribunal ordered that the appropriate deduction under section 80G and credit for taxes deducted at source (TDS) be granted. Consequently, the assessee's appeals were allowed, overturning the previous disallowances and adjustments made by the Revenue.

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Issues Involved:
1. Adjustment of INR 63,67,777 and INR 12,603,272 to the total income on account of the difference in the arm's length price (ALP) of international related party transactions.
2. Disallowance of mark-up charged by the associated enterprise (AE) in providing intra-group services.
3. Application of the 'Other Method' to benchmark the international transaction.
4. Violation of mandatory provisions of section 92C of the Act read with Rule 10AB of the Income Tax Rules, 1962.
5. Consistency in the acceptance of pricing of services in previous assessment years.
6. Incorrect computation of transfer pricing adjustment.
7. Corporate tax matters including disallowance under section 43B, 40a(ia), and delayed credit of employee contributions.
8. Short deduction under section 80G.
9. Short deduction of taxes deducted at source.
10. Initiation of penalty proceedings under sections 271(1)(c) and 270A of the Act.

Detailed Analysis:

1. Adjustment of INR 63,67,777 and INR 12,603,272 to the Total Income on Account of ALP Differences:
The assessee contested the adjustments made by the Revenue on account of differences in the ALP of its international related party transactions. The TPO had disallowed the 5% markup charged by the AE, arguing that the services provided did not warrant a markup on third-party costs. The TPO used the 'Other Method' instead of the TNMM and concluded that the services rendered did not add significant value. The DRP upheld this view, noting that the third-party costs already included a markup, and thus a double markup was not justified.

2. Disallowance of Mark-Up Charged by the AE:
The assessee argued that the TPO erroneously disallowed the 5% markup, disregarding comprehensive documentary evidence demonstrating value addition by the AE. The TPO's assumption that 88% of the costs were third-party costs was contested, with the assessee providing evidence that 98% of the costs were incurred in-house. The DRP upheld the TPO's decision, stating that no markup was warranted as the services did not add value.

3. Application of the 'Other Method' to Benchmark the International Transaction:
The assessee argued that the TPO's application of the 'Other Method' was inappropriate and that TNMM provided the most reliable measure of an arm's length result. The TPO had used the service provider as the tested party and disregarded the benchmarking analysis documented in the TP report. The DRP upheld the TPO's use of the 'Other Method'.

4. Violation of Mandatory Provisions of Section 92C and Rule 10AB:
The assessee contended that the Revenue violated the mandatory provisions of section 92C of the Act read with Rule 10AB of the Income Tax Rules, 1962. The DRP did not find merit in this argument and upheld the TPO's adjustments.

5. Consistency in Acceptance of Pricing in Previous Assessment Years:
The assessee argued that the pricing of services, including the markup, had been accepted by the Revenue in all past years (AYs 2010-11 to 2016-17) and there was no change in the facts and circumstances in AY 2017-18 and AY 2018-19. The DRP did not accept this argument and upheld the adjustments made by the TPO.

6. Incorrect Computation of Transfer Pricing Adjustment:
The assessee claimed that the Revenue incorrectly computed the transfer pricing adjustments. The DRP upheld the TPO's computation.

7. Corporate Tax Matters:
The assessee contested several corporate tax adjustments, including disallowances under sections 43B and 40a(ia), and delayed credit of employee contributions. The DRP upheld these adjustments.

8. Short Deduction Under Section 80G:
The assessee argued that the AO erred in granting short deduction under section 80G. The DRP upheld the AO's decision.

9. Short Deduction of Taxes Deducted at Source:
The assessee contended that the AO erred in granting short deduction of taxes deducted at source. The DRP upheld the AO's decision.

10. Initiation of Penalty Proceedings:
The assessee contested the initiation of penalty proceedings under sections 271(1)(c) and 270A of the Act. The DRP upheld the initiation of penalty proceedings.

Conclusion:
The Tribunal found that the 5% markup policy for IT services rendered was acceptable by international guidelines and as per the EU Joint Transfer Pricing Forum. The Tribunal held that the markup of 5% was sufficient to recoup the expenditure involved by the AE in providing the services. Consequently, the Tribunal directed that no other expenses other than the 5% markup be allowed on the support services rendered by the AE. The Tribunal also directed that the deduction under section 80G and the due TDS credit be given. The appeals of the assessee were allowed.

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