Transfer pricing characterization of AMP transactions and comparability tolerance leads to deletion of upward software segment adjustment

Transfer pricing issues concerning whether AMP payments constitute an international transaction were examined; AMP was treated as not representing an international transaction, with no ALP determination for AMP. Separately, comparability for the software development segment was assessed against a single comparable; the decision applied the tolerance limit in comparability analysis and concluded that the benchmark margin differential fell within the accepted tolerance, resulting in deletion of the upward TP adjustment in the software segment and conferring relief to the taxpayer.

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Issues: (i) Whether AMP (advertisement, marketing, publicity) expenditure constitutes an international transaction and the consequent ALP adjustment; (ii) Whether the rule of consistency binds the revenue in relation to AMP adjustments in recurring assessment years; (iii) Whether the benefit of the tolerance limit under the second proviso to Section 92C(2) of the Income-tax Act, 1961 is available where only one comparable is retained for benchmarking of software services and whether the upward TP adjustment in the software segment is justified.

Issue (i): Whether AMP expenditure constitutes an international transaction attracting transfer pricing adjustment (ALP) for the assessment year under consideration.

Analysis: The Tribunal examined preceding Coordinate Bench decisions in assessee's own case and relevant judicial precedent applied to AMP transactions, noting no material change in facts or law. The assessment and DRP directions were considered against earlier findings that AMP did not constitute an international transaction in the assessee's case.

Conclusion: The Tribunal concluded in favour of the assessee and deleted the ALP addition relating to AMP.

Issue (ii): Whether the rule of consistency requires the revenue to follow earlier Coordinate Bench decisions in subsequent assessment years on AMP.

Analysis: The Tribunal considered the recurrence of the issue across assessment years and the absence of any material change in facts or applicable law, and assessed whether the prior Coordinate Bench decisions bindingly govern the present assessment.

Conclusion: The Tribunal held that the rule of consistency applies and, following earlier Coordinate Bench rulings, ruled in favour of the assessee by deleting the AMP adjustment.

Issue (iii): Whether the second proviso to Section 92C(2) (tolerance limit +/-5%) applies when only one comparable (Tata Elxsi) remains for benchmarking the software services segment and whether the TPO's upward adjustment should be sustained.

Analysis: The Tribunal analysed Section 92C(2) as amended w.e.f. 01.10.2009, including both provisos, and applied precedent of the Coordinate Bench, Mumbai which interpreted the phrase "so determined" in the second proviso to extend the tolerance band even where only one ALP price is determined. The Tribunal compared the adjusted margin of the retained comparable (13.61%) with the assessee's margin (10.53%) and found the difference within the +/-5% tolerance.

Conclusion: The Tribunal allowed the assessee's contention, held that the second proviso to Section 92C(2) is applicable when only one comparable price is determined, and deleted the upward adjustment in the software development services segment in favour of the assessee.

Final Conclusion: The Tribunal allowed the substantive challenges to the transfer pricing adjustments on AMP and software services (applying rule of consistency and the tolerance provision under Section 92C(2)) and accordingly the assessee's appeal is partly allowed; other grounds not pressed or consequential were dismissed without adjudication.

Ratio Decidendi: The second proviso to Section 92C(2) of the Income-tax Act, 1961 (tolerance limit +/-5%) applies to the ALP "so determined" under subsection (2) and therefore the deemed-ALP tolerance is available even where only one comparable price is determined, permitting the actual transaction price to be treated as ALP if variation does not exceed five percent.

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