Salary of global sales staff included in arm's length price under TNMM; TPO's adjustment rejected under Section 143(1)

The ITAT Chennai held that the salary paid to global sales personnel was appropriately included in the arm's length price determined using the TNMM method and accepted by the TPO. The TPO's separate adjustment excluding the salary cross charge was unjustified. Consequently, the downward TP adjustment was deleted. The tribunal also directed the AO and FAA to expeditiously dispose of the pending rectification application and appeal filed under section 143(1) of the Act.

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ISSUES:

Whether the Transfer Pricing Officer (TPO) was justified in making a separate downward adjustment to the arm's length price (ALP) of salary paid to global sales personnel when the salary forms part of the operating margin of the software development (SWD) segment benchmarked using the Transactional Net Margin Method (TNMM).Whether the TPO/Dispute Resolution Panel (DRP) was justified in treating the ALP of cross-charge salary payments as nil due to lack of evidence of actual services rendered by global sales personnel.Whether the TPO/DRP erred in not netting off salary cross charges paid and received before making the transfer pricing adjustment.Whether adjustments/disallowances made in the intimation issued under section 143(1) of the Income Tax Act, 1961 (the Act) can be adjudicated in appeal arising from the final assessment order passed under section 143(3) r.w.s. 144C(13) of the Act.Whether the assessee's rectification application and appeal against the intimation under section 143(1) of the Act should be disposed of before adjudicating issues arising from the final assessment order.

RULINGS / HOLDINGS:

The TPO was not justified in separately culling out the salary cross charge for global sales personnel and making a separate transfer pricing adjustment because the salary cost forms part of the AE segment and the operating margin of the SWD segment, which has been accepted at arm's length under the TNMM method. The adjustment was therefore deleted.The DRP's treatment of the ALP of salary cross charges as nil was incorrect since the salary payments are "intrinsically and closely connected to the sale of software products and services to AE" and included in the operating margin benchmarked by TNMM, which the TPO had accepted as the Most Appropriate Method (MAM).The TPO/DRP erred in not netting off the salary cross charges paid and received by the assessee before making the transfer pricing adjustment.Adjustments/disallowances made in the intimation issued under section 143(1) of the Act cannot be adjudicated in appeal arising from the final assessment order under section 143(3) r.w.s. 144C(13) of the Act, as the cause of action for such adjustments arises from the intimation itself and not from the final assessment order.The assessee's rectification application and appeal against the intimation under section 143(1) of the Act remain pending disposal and should be adjudicated expeditiously before addressing related issues in the final assessment proceedings.

RATIONALE:

The court applied the statutory provisions of the Income Tax Act, 1961, particularly sections 143(1), 143(3), 144C, 92CA, and 246A, governing assessment, transfer pricing, and appeals.The court relied on precedent including the decision that once the TNMM is accepted as the Most Appropriate Method (MAM) for benchmarking an international transaction segment, it is impermissible for the TPO to apply a different method selectively to a single component of that segment, as held in the cited case of Magneti Marelli Powertrain India Pvt Ltd. This principle prevents "chaos" and ensures consistency in ALP determination.The court emphasized that salary costs allocated to global sales personnel are part of the operating cost base of the SWD segment, which was benchmarked as a whole under TNMM, and separate adjustment distorts the ALP determination.The court followed the principle that adjustments made in the intimation under section 143(1) of the Act are appealable separately before the First Appellate Authority under section 246A, and cannot be challenged in appeals arising from final assessment orders under section 143(3) unless specifically adjudicated therein.The court noted the pendency of rectification and appeal proceedings against the intimation under section 143(1) and directed their expeditious disposal, reflecting a procedural safeguard to avoid multiplicity of proceedings and ensure proper adjudication of issues in their appropriate forum.

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