Transfer pricing adjustments remitted for proper benchmarking using CUP method for cost allocation services and TNMM for web hosting charges

ITAT Mumbai remitted transfer pricing adjustments back to AO/TPO for proper benchmarking using CUP method instead of TNMM for cost allocation services, directing comparison with similar MNC services. For web hosting charges, tribunal ordered benchmarking of 5% markup using TNMM method with available comparables. Share-based payment addition was deleted as tribunal found actual employee benefit expenses were incurred, not notional losses as claimed by DRP. The case involved multiple transfer pricing issues requiring proper methodology application and verification of supporting documentation.

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Issues Involved:

1. Transfer Pricing Adjustments for IT Charges and Web Hosting Services.
2. Share-Based Payments and Notional Loss.
3. Dividend Distribution Tax Rate and Computation.
4. Demand for Dividend Distribution Tax and Interest.

Detailed Analysis:

1. Transfer Pricing Adjustments for IT Charges and Web Hosting Services:

The primary issue was the transfer pricing adjustments related to IT charges and web hosting services. The assessee challenged the adjustments made by the Transfer Pricing Officer (TPO) who computed the arm's-length price using the Comparable Uncontrollable Price (CUP) method instead of the assessee's preferred methods. The TPO rejected the assessee's documentation and applied an estimation method, determining the arm's-length price based on man hours and rates without a clear basis. The Tribunal found that the TPO did not properly apply the CUP method and directed a reassessment using appropriate benchmarking methods, emphasizing the need for a scientific and standard approach to cost allocation.

For web hosting services, the Tribunal noted that the TPO similarly used an arbitrary method for adjustment. The Tribunal directed the TPO to reassess using the Transactional Net Margin Method (TNMM) or CUP method, considering the actual cost plus a 5% markup, as the services were availed from a third party and shared among group entities.

2. Share-Based Payments and Notional Loss:

The dispute involved the disallowance of expenses related to share-based payments under the Share Match Plan. The Dispute Resolution Panel (DRP) considered these payments as notional losses, arguing that no actual expenditure was incurred by the assessee. However, the Tribunal found that the expenses were actual costs incurred for employee welfare, as the company matched employee contributions for share purchases. The Tribunal directed the deletion of the disallowance, recognizing the expenses as legitimate staff welfare costs.

3. Dividend Distribution Tax Rate and Computation:

The assessee contested the application of the Dividend Distribution Tax (DDT) rate, arguing it should be computed according to the Double Taxation Avoidance Agreement (DTAA) rather than the domestic rate under Section 115O of the Income Tax Act. However, the assessee withdrew these grounds, acknowledging that previous judicial pronouncements in its own case had decided against its position.

4. Demand for Dividend Distribution Tax and Interest:

The issue concerned the computation of a demand for dividend distribution tax and interest totaling Rs. 84,09,05,780. The Tribunal remitted the matter back to the Assessing Officer for verification of the records and a decision on the merits, ensuring the assessee is provided an opportunity to be heard.

Conclusion:

The appeal was partly allowed, with the Tribunal directing reassessment of transfer pricing adjustments and share-based payment disallowances, while dismissing the grounds related to the dividend distribution tax rate. The demand for dividend distribution tax was remitted for further examination.

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