ITAT sets aside transfer pricing adjustment, directs re-computation using TNM method instead of CUP method for manufacturing segment

ITAT Mumbai set aside transfer pricing adjustment in manufacturing segment, directing TPO/AO to re-compute arm's length price using TNM method instead of CUP method, consistent with earlier year's approach. Regarding technical support services fees, tribunal excluded Excel Infoways Ltd as comparable due to closure of ITES segment and fluctuating margins, and rejected Hartron Communications Ltd for extraordinary profits and functional dissimilarity. Assessee's appeal was allowed.

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Issues Involved:
1. Adjustment to the arm's length price (ALP) of the international transaction of export of finished goods.
2. Use of two methods (TNMM and CUP Method) for calculating ALP.
3. Treatment of unutilized capacity cost and start-up & downtime cost.
4. Adjustment to the ALP of the international transaction of Technical Support Services.
5. Adjustment towards Corporate Social Responsibility.
6. Adjustment towards interest income.

Summary:

Issue 1: Adjustment to the ALP of the international transaction of export of finished goods
The assessee contested the adjustment of Rs. 3,08,95,543/- made by the AO/TPO using the Comparable Uncontrolled Price (CUP) Method instead of the Transactional Net Margin Method (TNMM). The Tribunal noted that in the assessee's own case for AY 2010-11, the CUP method was held inapplicable due to differences in volume, geography, functions performed, and risks assumed. Consistent with this view, the Tribunal directed the TPO/AO to re-compute the ALP using the TNMM.

Issue 2: Use of two methods (TNMM and CUP Method) for calculating ALP
The assessee argued that the AO/TPO erred by using both TNMM and CUP Method and selecting the method that resulted in a higher adjustment. The Tribunal, agreeing with the assessee, directed the AO/TPO to apply the most appropriate method, which in this case is the TNMM, as previously determined.

Issue 3: Treatment of unutilized capacity cost and start-up & downtime cost
The assessee objected to the treatment of these costs as operating in nature while calculating margins under TNMM. However, since the Tribunal decided the first two grounds in favor of the assessee, this issue was deemed academic and not adjudicated.

Issue 4: Adjustment to the ALP of the international transaction of Technical Support Services
The assessee contested the adjustment of Rs. 1,88,85,905/- made by the AO/TPO. The Tribunal noted that the TPO rejected the assessee's comparable companies and introduced new ones, leading to the adjustment. The Tribunal directed the exclusion of M/s Excel Infoways Ltd and M/s Hartron Communications Ltd from the list of comparable companies, as they were not considered good comparables in several decisions. The AO/TPO was instructed to re-compute the ALP accordingly.

Issue 5: Adjustment towards Corporate Social Responsibility
The assessee challenged the adjustment of Rs. 7,37,323/- towards Corporate Social Responsibility. The Tribunal did not specifically address this issue in the summary provided, implying that the main focus was on the transfer pricing adjustments.

Issue 6: Adjustment towards interest income
The assessee contested the adjustment of Rs. 21,714/- towards interest income. Similar to Issue 5, the Tribunal did not specifically address this issue in the summary provided.

Conclusion:
The appeal filed by the assessee was treated as allowed, with the Tribunal directing the AO/TPO to re-compute the ALP of the transactions in accordance with the Tribunal's decisions on the transfer pricing adjustments. The order was pronounced on 31.10.2023.

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