2015 (5) TMI 932 - AT - Income Tax

TP Adjustments - Disregarding Profit Split Method ( PSM ) as the most appropriate method for benchmarking Appellant s international transactions - held that - The claim of the assessee that the issue is covered by the order of the Co-ordinate Bench in GOIPL 2014 (4) TMI 787 - ITAT DELHI wherein held that when a transaction is integrated and interrelated and when costs are incurred by multiple entities and the revenues are to be apportioned to multiple entities then the factual conclusions of the T.P.O have to be vacated - the Profit Split Method (PSM) is the M.A.M for the reason that the assessee generates revenue out of operations that are highly integrated - When one transaction (example transmitting data from a destination in one country to a destination in a different country in a secured manner) requires deployment of assets and functions of different entities located in different Geographical locations to ultimately deliver services and when such combined efforts generate revenues the MAM for determining arm s length price is Profit Split Method (PSM) thus being the predecessor to the assessee is found to be correct. Relative contribution has to be determined based on key value drivers - there is a general consensus on the principles of allocation of residual surplus - as per rule 10B(l)(d) of the IT Rules a contribution or residual PSM would need to be supplemented by a comparable PSM - the TPO should determine the ALP by adopting residual PSM as the MAM and by allocating residual profits based on the relative value of each enterprise s contribution In the absence of any submission whatsoever on the part of the Revenue despite more than adequate opportunities having been provided we find on our independent study of the reasoning available on record brought out in the TPO s order which has been upheld by the DRP that in the face of similarity of reasoning which already stands considered in the case of GOIPL the issue needs to be restored back to the TPO with identical directions. Decided in favour of assesse for statistical purposes

Summary

Issues Involved:
1. Disregarding Profit Split Method (PSM) as the most appropriate method for benchmarking Appellant's international transactions.
2. Applying the Transactional Net Margin Method (TNMM) instead of PSM.
3. Rejection of the judicial precedent in the case of the Appellant's predecessor entity.

Issue-wise Detailed Analysis:

1. Disregarding Profit Split Method (PSM):
The assessee argued that the issue is covered in its favor by the decision of the ITAT in the predecessor entity's case, Global One India Private Limited (GOIPL). The assessee contended that it follows the same business model, operations, services, and employs the same management personnel and employees as GOIPL. The Tribunal noted that the assessee had applied the PSM, which was not approved by the Transfer Pricing Officer (TPO), who instead considered TNMM as the most appropriate method. The Tribunal found that similar reasoning was applied in the predecessor's case, and the Co-ordinate Bench had already deliberated and accepted PSM as the appropriate method.

2. Applying Transactional Net Margin Method (TNMM):
The TPO's rejection of PSM in favor of TNMM was based on the argument that no unique intangibles or value-added services were provided by the assessee. The Tribunal observed that the TPO's reasoning was identical to that in the GOIPL case, where the Co-ordinate Bench had rejected the TPO's justification for using TNMM. The Tribunal noted that the TPO's conclusion that the assessee's business does not have any integration with other group entities and operates independently in India was not accepted by the Co-ordinate Bench in the predecessor's case.

3. Rejection of Judicial Precedent:
The Tribunal highlighted that the DRP and the TPO did not address the judicial precedent set in the GOIPL case, despite it being cited by the assessee. The Tribunal emphasized that the TPO's reasoning that res judicata does not apply in transfer pricing proceedings was incorrect. The Co-ordinate Bench had held that consistency should be a rule rather than an exception, and the TPO did not provide valid reasons to depart from the earlier view of accepting PSM as the most appropriate method.

Conclusion:
The Tribunal concluded that the issue is covered by the order of the Co-ordinate Bench in the GOIPL case. It directed the TPO to reconsider the application of PSM as the most appropriate method, following the directions given by the Co-ordinate Bench. The Tribunal allowed the assessee's appeal for statistical purposes and remitted the matter back to the TPO for a fresh decision in accordance with the law, ensuring that the assessee is given a reasonable opportunity of being heard.

Order Pronounced:
The order was pronounced in the open court on 08th May 2015.