2024 (2) TMI 1480 - AT - Income Tax

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, ... TP Adjustment - payment for cost allocation of COE3 / IT charges - services based on CUP Method in accordance with Section 92CA(3) of the Act - HELD THAT:- As similar services were offered to the assessee from the A.Y. 2002-03 onwards. In short, assessee was not able to demonstrate the various cost incurred by the cost centre R&M to BP group worldwide and allocation of cost based on such PC count cannot be the only method of allocation. It does not appreciate the actual replacement and actual service allocation across the group concerns. It may be a simple way of indirect allocation of cost without there being any proper justification. Once the assessee managed to restrict the charges at USD 795000 there is no point going back to justification based on allocation of cost of RM cost center. It is enough benchmarking has to be done only the value of restricted values of the services offered by the AE. It is also not proper for benchmarking the above transactions based on TNMM method. Therefore, in our considered view the benchmarking has to be done based on the CUP Method and the assessee is directed to benchmark the above transactions based on the similar comparable global companies who are offering the similar services across its branches. There are several Multi-National companies who are having similar objectives. Therefore, we are inclined to remit this issue back to the file of the AO / TPO to benchmark the same on the basis of CUP Method and we direct them not to adopt adhoc method as adopted by them in the current assessment year or adopted in the past. Accordingly, ground raised by the assessee is allowed for statistical purpose. Assessee could not establish the total cost incurred by the AE for the web hosting charges - Ideally assessee / TP Officer should have adopted one of the approved Method. However, assessee has not made available any comparable and also Transfer Pricing Officer has preferred to proceed with estimation of application on the basis of man hour / man hour rate without bringing anything on record on what basis. From the record we observe that assessee has taken services of third party and also submitted copy of tax invoices of the third party. What is necessary to be benchmarked is the mark-up applied by the assessee at 5%. Since the actual cost of providing webhosting was brought on record. The allocation was made based on the services offered to various units. Whether this mark-up is within the Arm’s Length Price has to be determined it can be done only on the basis of TNMM. The assessee has carried on with the twenty-two (22) comparable and the data of all the comparable are already available on record. In our considered view Transfer Pricing Officer has to benchmark based on the above comparable available on record and also if required he may carry out benchmarking of the above margin with the comparable available on record or may add few more to determine proper Arm’s Length Price in this transaction. Accordingly, we deem it fit and proper to remit this issue back to the file of the Assessing Officer/ Transfer Pricing Officer to benchmark the above transactions as per law. Addition of expenses pertaining to 'Share based payments - DRP has considered the market value of shares of holding company and the difference of purchase price of the shares of the holding company and observed it as a notional loss - HELD THAT: AR filed details of shares purchased, name of the various executives which is placed on record and also assessee has filed copy of the tax statements of few employees to demonstrate that they have contributed the amount and to the extent of contribution made by the assessee are declared as perquisite. Further, the assessee also deducted the relevant perquisite tax. Therefore, as per the facts submitted before us, it clearly shows that assessee has incurred the above employee benefit expenses towards purchase of shares of the holding company. Therefore, this is not a notional loss to the assessee company but it is an actual cost incurred by the assessee towards purchase of the shares of the holding company to motivate the existing employees. We observe that Ld.DRP has considered the market value of shares of holding company and the difference of purchase price of the shares of the holding company and observed it as a notional loss. We observe that assessee has not recorded the market price but recorded the actual share value of the allotted shares in its books of accounts. Therefore, there is no question of claiming the notional loss in this case. Accordingly, we direct the Assessing Officer to delete the additions proposed by Ld. Ld. DRP, accordingly, ground raised by the assessee is allowed. Creating demand including interest, dividend distribution tax - As considering the overall submissions made by the assessee, we are inclined to remit this issue back to the file of assessing officer with a direction to verify the records submitted by the assessee on merit and as per law. 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.