2025 (6) TMI 1388 - AT - Income Tax

TPO must reconsider transfer pricing adjustments after failing to examine internal TNMM method and comparable selection errors

Synechron Technologies Pvt. Ltd. Versus ACIT Circle 6 (1) (1), Bangalore

ITAT Bangalore restored transfer pricing adjustment matter to TPO for fresh consideration after finding TPO failed to examine assessee's justification for ... TP Adjustment - comparable selection - selection of MAM - As argued TPO has not at all considered the replies of the assessee with respect to the justification of the most appropriate method i.e. internal TNMM applied by the assessee and prayed that this issue may kindly be restored to the file of TPO for examining afresh and also TPO has erred in selecting the comparables - HELD THAT:- We are of the view that this issue requires fresh consideration at the end of TPO, therefore, we restore this issue to the file of TPO for examining afresh. The contentions raised by the assessee remained open vis-à-vis inclusion and exclusion of the comparables by applying the appropriate filter. Needless to say that the TPO will grant meaningful opportunity before passing any order. Interest on delayed receivables - assessee has basically argued that these outstanding receivables is not per se an international transaction and hence cannot be subjected to TP adjustments - HELD THAT:- So far as the argument of assessee that the transaction of outstanding receivables is not an international transaction, we do not find any force in this argument because now there are so many judgements on this issue, wherein it has been held that the transactions of outstanding receivables is an international transaction. Applicability of rate - As we observe that TPO has erred in applying LIBOR+450 basis points as a rate of interest, therefore, we modify this rate of interest to the tune of LIBOR+200 basis points, in the interest of justice and direct the TPO to calculate the interest attributable to the outstanding receivables accordingly. TPO in computing the ALP of the intra-group services payment to NIL - This issue requires fresh consideration at the end of TPO. Particularly, in view of the submissions made by the assessee that some payments were made by assessee in the earlier years also in pursuance to such agreements, which are akin to the earlier year Global policy of the assessee. TPO will compare the Global policy of the assessee as well as the agreements in force and then comment as to whether the nature of payments made is in line with the earlier payments. TPO will observe whether as per the principle of consistency, the claim of the assessee is to be allowed or not. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions examined by the Tribunal in this appeal pertain to the determination of Arm's Length Price (ALP) under the Transfer Pricing provisions of the Income Tax Act, 1961, specifically for the assessment year 2021-22. The issues considered include:Whether the Transfer Pricing Officer (TPO) erred in rejecting the comparables identified by the assessee for the Software Development (SWD) segment and in not applying the most appropriate method, i.e., the internal Transactional Net Margin Method (TNMM), for computing ALP of international transactions with Associated Enterprises (AEs).The correctness of the TPO's adjustment for interest on delayed outstanding receivables from AEs, including the applicability of such transactions as international transactions and the appropriate interest rate to be applied.The validity of the TPO's adjustment relating to corporate cost allocation paid to AEs on account of Intra Group Services (IGS), specifically the disallowance of payments made by the assessee on the ground that no services were rendered.Ancillary issues related to the inclusion and exclusion of comparables in benchmarking and procedural fairness in the TPO's consideration of the assessee's submissions and evidence.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Rejection of Comparables and Selection of Most Appropriate Method for SWD SegmentRelevant Legal Framework and Precedents: The determination of ALP under Section 92CA of the Income Tax Act requires the application of the most appropriate method as prescribed under the Transfer Pricing Regulations, including TNMM. Precedents emphasize that the selection of comparables and the method must be based on sound economic and commercial rationale, with due consideration to the facts and circumstances of the case.Court's Interpretation and Reasoning: The Tribunal noted that the TPO rejected the comparables identified by the assessee without adequately considering the assessee's submissions justifying the use of internal TNMM as the most appropriate method. The assessee had transactions of greater volume with non-AEs, supporting the internal TNMM application. The Tribunal found that the TPO's approach lacked a fresh and meaningful examination of the comparables and the method.Key Evidence and Findings: The assessee's detailed submissions and data on internal transactions were not sufficiently considered by the TPO. The TPO's order did not address the rationale for rejecting the internal TNMM method and the comparables proposed by the assessee.Application of Law to Facts: Given the legislative mandate to apply the most appropriate method and to consider relevant comparables, the Tribunal held that the TPO's rejection was premature and required reconsideration.Treatment of Competing Arguments: While the Revenue defended the TPO's selection of comparables and method, the Tribunal favored the assessee's contention for a fresh examination, emphasizing procedural fairness and adherence to the Transfer Pricing framework.Conclusion: The Tribunal restored the issue to the TPO for fresh adjudication, directing that the TPO grant a meaningful opportunity to the assessee to present its case on comparables and the appropriateness of the internal TNMM method.Issue 2: Imputation of Interest on Delayed Outstanding ReceivablesRelevant Legal Framework and Precedents: Outstanding receivables from AEs are recognized as international transactions under the Transfer Pricing provisions, and interest imputation on delayed payments is a well-established principle upheld by judicial precedents. The applicable interest rate should reflect an arm's length rate consistent with market conditions.Court's Interpretation and Reasoning: The Tribunal rejected the assessee's argument that outstanding receivables do not constitute international transactions, relying on established case law confirming the contrary. However, the Tribunal found that the TPO erred in applying an interest rate of LIBOR plus 450 basis points, which was excessive.Key Evidence and Findings: The Tribunal observed that the appropriate interest rate should be LIBOR plus 200 basis points, reflecting a more reasonable and justifiable market rate.Application of Law to Facts: The Tribunal modified the interest rate to LIBOR plus 200 basis points and directed the TPO to recalculate the interest adjustment accordingly.Treatment of Competing Arguments: The Revenue's reliance on the higher interest rate was not accepted, and the Tribunal balanced the interests of justice by reducing the rate.Conclusion: The Tribunal upheld the imputation of interest on delayed receivables as an international transaction but modified the interest rate to LIBOR plus 200 basis points.Issue 3: Adjustment on Intra-Group Services (IGS)Relevant Legal Framework and Precedents: Payments for intra-group services must be benchmarked to determine their ALP. The principle of consistency and the requirement to demonstrate actual receipt of services are critical. The Transfer Pricing Regulations and judicial pronouncements require that such payments be supported by agreements and evidence of service rendition.Court's Interpretation and Reasoning: The Tribunal found that the TPO rejected the intra-group services payments on the ground that no services were rendered, without adequately considering the additional documents and evidence submitted by the assessee before the Dispute Resolution Panel (DRP). The Tribunal emphasized the need to examine the global policy of the assessee and prior year agreements to assess consistency and the nature of payments.Key Evidence and Findings: The assessee submitted agreements and evidence of payments in earlier years consistent with the current transactions, which the TPO had not fully considered.Application of Law to Facts: The Tribunal directed the TPO to reassess the issue afresh, taking into account the global policy, agreements, and the principle of consistency, and to determine whether the payments should be included in operating costs.Treatment of Competing Arguments: The Revenue's reliance on the absence of service rendition was set aside in favor of a comprehensive review of evidence.Conclusion: The Tribunal remitted the issue to the TPO for fresh examination with directions to consider all relevant documents and principles.Ancillary Issues: Inclusion and Exclusion of ComparablesThe Tribunal observed that the contentions relating to the inclusion and exclusion of comparables (grounds 5 and 6) were linked to the primary issue of method selection and comparables rejection. These issues were left open for reconsideration by the TPO during the fresh adjudication.3. SIGNIFICANT HOLDINGSThe Tribunal's key legal determinations and principles established are as follows:'The TPO has not at all considered the replies of the assessee with respect to the justification of the most appropriate method i.e. internal TNMM applied by the assessee and prayed that this issue may kindly be restored to the file of TPO for examining afresh.'Outstanding receivables from Associated Enterprises constitute international transactions and are subject to transfer pricing adjustments.'So far as the applicability of rate is concerned, we observe that TPO has erred in applying LIBOR+450 basis points as a rate of interest, therefore, we modify this rate of interest to the tune of LIBOR+200 basis points, in the interest of justice and direct the TPO to calculate the interest attributable to the outstanding receivables accordingly.'Payments for intra-group services must be examined in light of the global policy and prior agreements, with the principle of consistency guiding the determination of ALP.'The TPO will compare the Global policy of the assessee as well as the agreements in force and then comment as to whether the nature of payments made is in line with the earlier payments. The TPO will observe whether as per the principle of consistency, the claim of the assessee is to be allowed or not.'The Tribunal emphasized procedural fairness, directing the TPO to grant meaningful opportunity to the assessee before passing any fresh order.Final determinations included the remand of issues relating to the SWD segment comparables and method selection, the modification of interest rate on delayed receivables, and the remand of the intra-group services adjustment for fresh consideration. The appeal was allowed for statistical purposes, indicating that substantive issues require reconsideration by the TPO in accordance with the directions issued.