2024 (5) TMI 344 - AT - Income Tax

ITAT Mumbai deletes transfer pricing adjustments favoring internal TNMM over external analysis under Section 92C

The Boston Consulting Group (India) Private Limited Versus DCIT – Circle - 3 (3) (2), Mumbai

ITAT Mumbai ruled in favor of the assessee on transfer pricing adjustments. The tribunal held that internal TNMM analysis should be preferred over ... TP Adjustment - MAM - application of TNMM by TPO as most appropriate method - Addition of proviso for management consultancy services - wherever Internal TNMM is available the same should be given preference over external TNMM analysis? - HELD THAT:- It would be pertinent to understand the setup of a large consultant global firm like that of the assessee, the consultants are not only qualified but many of them are super qualified specialists and super specialists having different years of experiences. For Example, the consultant can be a simple MBA, MBA + IIT Graduate, MBA + CA, though they may be placed in the same category like project leader, or manager but due to their qualification and super specialty their hourly rates may be differ. Therefore, it would be incorrect to say that there is a discrimination in charging of hourly rates. Considering the facts of the case in totality, we are of the considered view that the action of the Transfer Pricing Officer is not only erroneous but also against the facts of the case in hand. Assuming that the TPO application of TNMM is the most appropriate method, we find that while applying the TNMM, the TPO has computed the profitability of BCG India at a company level and subsequently computed a proportionate profitability to impute the adjustment with respect to the international transaction of provision of management consultancy services. If the assessee’s segmental profit and loss account is considered wherein the revenue and expenses are allocated between AE and Non-AE on an appropriate basis. Then the profitability arising of the AE segment is 44.02% whereas in case of Non-AE it is 3.77%. On a perusal of the internal TNMM analysis, we find that the assessee has earned significantly higher margins in the AE Segment vis-à-vis Non-AE Segment. Rule 10B also provides that “the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base”. In our considered opinion the word “comparable” may encompass internal comparable or external comparable. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus wherever Internal TNMM is available the same should be given preference over external TNMM analysis. Even on this point the assessee is in a better footing, However, as mentioned elsewhere, we are of the considered view that the CUP applied by the assessee does not have any flaw or error and the same should be accepted. We accordingly direct the Assessing Officer to delete the TP Adjustment in relation to proviso for management consultancy services. Ground No. 1 is allowed. T.P Adjustment in relation to payment of licence fees for time and billing software - HELD THAT:- As decided in assessee own case [2024 (2) TMI 1377 - ITAT MUMBAI] for the A.Y. 2010-11 TPO/AO has arrived at the ALP by not adopting any of the methods prescribed u/s 92C of the Act in respect of (i) payment of license fees for time and billing software, (ii) payment of regional administration and regional co-ordination cost allocation and (iii) payment of information technology cost allocation, thus we direct the Assessing Officer / Transfer Pricing Officer to delete the TP Adjustment in relation to payment of licence fees for time and billing software. Decided in favour of assessee. TP adjustment on provision of regional coordination services - selection of comparables companies - Before us, it has been argued that the TPO has grossly erred in excluding Vatika Marketing Limited - as emphatically pointed out that Lancor Maintenance & Services Ltd., included in the final determination of Arm’s Length Price has similar services and therefore, either Vatika Marketing Limited should be included or Lancor Maintenance & Services Ltd. should also be excluded - HELD THAT:- The reasons given by the Transfer Pricing Officer for excluding Vatika Marketing Limited are mentioned elsewhere. Let us now see the business of Lancor Maintenance & Services Ltd.,. The income shown by this company is “income from Maintenance operations” and in its segment information “the company is engaged in the business of maintenance and management of properties and there is no separately identifiable business or geographical segments”. In the light of the above, we are of the considered view that the Transfer Pricing Officer has erred in excluding Vatika Marketing Limited which is also engaged in the similar business as that of the Lancor Maintenance & Services Ltd.,. We accordingly direct the TPO / AO to include Vatika Marketing Limited for the determination of Arm’s Length Price of the impugned transaction. Ground No. 3 is Accordingly, allowed. TP Adjustment on payment of information technology cost allocation - HELD THAT:- As decided in own case A.Y. 2008-09 [2020 (8) TMI 172 - ITAT MUMBAI] TPO/AO has arrived at the ALP by not adopting any of the methods prescribed u/s 92C of the Act in respect of (i) payment of license fees for time and billing software, (ii) payment of regional administration and regional co-ordination cost allocation and (iii) payment of information technology cost allocation. We are of the considered view that the ratio laid down in Lever India Exports Ltd. [2017 (2) TMI 120 - BOMBAY HIGH COURT] Merck Ltd. [2016 (8) TMI 561 - BOMBAY HIGH COURT]; Johnson & Johnson Ltd. [2017 (4) TMI 1281 - BOMBAY HIGH COURT] and Kodak India Pvt .Ltd. [2016 (7) TMI 677 - BOMBAY HIGH COURT] is squarely applicable to the facts of the case. Therefore, following the same, we allow the 1st, 2nd and 3rd ground of appeal. Short granting interest u/s 244A - HELD THAT:- As decided in asseessee own case A.Y. 2010-11 [2024 (2) TMI 1377 - ITAT MUMBAI] issue raised by the assessee is allowed with the direction that the AO may consider extending the benefit to the assessee upto the date of actual receipt of refund. Issues Involved:1. Determination of arm's length price for management consultancy services.2. Adjustment of arm's length price for payment of license fees for time and billing software.3. Adjustment of arm's length price for regional coordination services.4. Adjustment of arm's length price for information technology cost allocation.5. Adjustment of arm's length price for reimbursements paid.6. Short-granting of TDS credit.7. Charging of interest u/s 234B.8. Charging of interest u/s 234D.9. Short-granting of interest u/s 244A.10. Initiation of penalty proceedings u/s 271(1)(c).Summary:1. Determination of arm's length price for management consultancy services:The assessee contested the adjustment of Rs. 7,12,29,302 made by the AO/TPO under the directions of the DRP. The TPO rejected the Comparable Uncontrolled Price (CUP) method used by the assessee and applied the Transactional Net Margin Method (TNMM) instead. The TPO selected comparables and determined a mean margin of 37.21%. The Tribunal found the TPO's rejection of CUP and application of TNMM erroneous and directed the AO to delete the TP adjustment, allowing Ground No. 1.2. Adjustment of arm's length price for payment of license fees for time and billing software:The Tribunal followed the decision of the Coordinate Bench in the assessee's own case for previous assessment years, where it was held that the TPO did not adopt any prescribed method for determining ALP. The Tribunal directed the AO/TPO to delete the TP adjustment, allowing Ground No. 2.3. Adjustment of arm's length price for regional coordination services:The TPO excluded certain comparables and included others, leading to an adjustment of Rs. 29,96,502. The Tribunal found that the TPO erred in excluding Vatika Marketing Limited while including Lancor Maintenance & Services Ltd., which engaged in similar business activities. The Tribunal directed the inclusion of Vatika Marketing Limited for ALP determination, allowing Ground No. 3.4. Adjustment of arm's length price for information technology cost allocation:The Tribunal followed the Coordinate Bench's decision in the assessee's own case for previous assessment years, where it was held that the TPO did not adopt any prescribed method for determining ALP. The Tribunal directed the AO/TPO to delete the TP adjustment, allowing Ground No. 4.5. Adjustment of arm's length price for reimbursements paid:The Tribunal found the reasoning for this adjustment identical to that of Grounds No. 2 and 4. Following the decision of the Coordinate Bench, the Tribunal directed the AO/TPO to delete the TP adjustment, allowing Ground No. 5.6. Short-granting of TDS credit:Ground No. 6 was not pressed by the assessee and was dismissed as not pressed.7. Charging of interest u/s 234B:Ground No. 7 was found to be consequential and was not separately adjudicated.8. Charging of interest u/s 234D:Ground No. 8 was found to be consequential and was not separately adjudicated.9. Short-granting of interest u/s 244A:The Tribunal followed the Coordinate Bench's decision in the assessee's own case for the previous assessment year, directing the AO to consider extending the benefit to the assessee up to the date of actual receipt of the refund, allowing Ground No. 9.10. Initiation of penalty proceedings u/s 271(1)(c):The Tribunal did not separately adjudicate this ground, leaving it open without adjudication due to pending litigation in a related case before the Hon'ble Supreme Court.Conclusion:The appeal filed by the assessee was partly allowed, with specific directions to the AO/TPO to delete the TP adjustments and reconsider interest calculations. The additional ground challenging the validity of the assessment order was left open without adjudication.