TPO Cannot Reject Previously Accepted Certified Segmental Comparison Without Adjustment Under Transfer Pricing Rules

The ITAT Chennai held that the TPO cannot reject the certified segmental comparison of AE and Non-AE entities when it had accepted the same basis of segmentation in the prior year without adjustment. Relying on precedent, the tribunal ruled that a consistent factual position established in earlier assessments should not be altered in subsequent years. The Internal TNMM was affirmed as the most appropriate method, especially when audited segmental data is available, and was preferred over external TNMM. The appeal was allowed, directing acceptance of the Internal TNMM based on audited segmentation certified by the external CA.

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ISSUES:

Whether the rejection of certified segmentation between Associated Enterprise (AE) and Non-AE segments for transfer pricing purposes was justified.Whether the application and rejection of the Value Added Expense (VAE) filter in selecting comparable companies for benchmarking international transactions was appropriate.Whether the computation of Transfer Pricing (TP) adjustment was erroneous due to reliance on the original instead of the rectified Transfer Pricing Officer (TPO) order.

RULINGS / HOLDINGS:

On the rejection of segmentation: The Court held that the certified segmentation and internal TNMM method adopted by the assessee is the "most appropriate method" and should be accepted, especially since the same method and segmentation were accepted in prior and subsequent years; rejection without specific defects in sample invoices was improper.On the VAE filter and selection of comparables: This issue was rendered academic and not adjudicated due to the primary ruling in favor of the assessee on segmentation and internal TNMM.On computation of TP adjustment: Similarly, this ground was not adjudicated as it became academic following the acceptance of the internal TNMM method and segmentation.

RATIONALE:

The Court applied the principle of consistency as established by precedent that "where a fundamental aspect permeating through the different assessment years has been found as a fact ... it would not be at all appropriate to allow the position to be changed in a subsequent year."Reliance was placed on judicial decisions affirming the acceptability of internal benchmarking, including audited and certified segmental results, over external comparables when available and reliable.The Court emphasized that the TPO's insistence on the entire set of bills and vouchers was impractical and unjustified when sample invoices were not specifically challenged for defects.Precedents from coordinate Benches were followed, which held that internal TNMM benchmarking is superior and that unaudited or audited segmental data should be accepted unless errors are demonstrated.The Court remitted the issue to the TPO to reconsider the ALP determination based on the internal TNMM method and certified segmentation, directing adherence to prior accepted principles and decisions.

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