2023 (1) TMI 469 - AT - Income Tax

TP Adjustment - Rejection of Associated Enterprises as the tested party - CIT (A) has categorically held that the foreign Associated Enterprises is the least complex entity and therefore there is no reason that same cannot be taken as a tested party - HELD THAT - OECD guideline states that choice of the tested party should be constant with the functional analysis of the transaction. Generally the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparable can be found and further it would be most often the party that is the less complex functional analysis. UN transfer pricing guidelines are also on the similar lines. Further the Indian Jurisprudence is also on the similar principles. Therefore the principle emerges that it is better if a tested party is taken whose functions are less complex in nature does not own any intangible generally and the results which can be verified by using reliable data base. In the present case the foreign Associated Enterprises is admittedly least complex functions and does not know any intangible and further the assessee has used the Standard and Poor s CompStat and Merchant Database. The comparability analysis shows that the total population of 285 companies was available with respect to market sales support and customer relationship services and 940 companies were available in provision of revenue cycle management services by using one source global business process database. Thus foreign Associated Enterprises satisfied all the criteria for being taken as a tested party. TPO merely rejected the same as Associated Enterprises is located in different geographical locations. It a proper justification by the learned Transfer Pricing Officer to reject the foreign Associated Enterprises as a tested party. CIT (A) order is affirmed. With respect to comparability analysis the directions are given by the learned CIT (A) in Para no. 11 which are subject to verification by the learned TPO. We do not find any infirmity in these directions. Accordingly grounds of the appeal of AO are dismissed. Appeal filed by the AO is dismissed.

Summary

Issues Involved:
1. Application of special provisions of adjustments under Section 92 to 92F (transfer pricing) to international transactions.
2. Determination of the tested party in transfer pricing analysis.
3. Comparability analysis in transfer pricing.
4. Powers of the CIT(A) under Section 251(1)(a) of the Income-tax Act.
5. Use of data for comparability analysis.

Issue-wise Detailed Analysis:

1. Application of special provisions of adjustments under Section 92 to 92F (transfer pricing) to international transactions:
The Assessee contended that the CIT(A) erred in not adjudicating their submissions against the application of special provisions of adjustments under Section 92 to 92F to their international transactions. The Tribunal noted that the cross objection was merely supportive in nature and did not delve into this issue further.

2. Determination of the tested party in transfer pricing analysis:
The primary contention was whether the foreign Associated Enterprises (AE) should be considered the tested party. The Assessee argued that the AE, being the least complex entity with limited risk, was appropriately chosen as the tested party. The Transfer Pricing Officer (TPO) rejected this, arguing that the AE's geographical spread made comparability analysis difficult. The CIT(A) upheld the Assessee's position, stating that the AE was the least complex entity and thus suitable as the tested party. The Tribunal affirmed the CIT(A)'s decision, emphasizing that the AE satisfied all criteria for being the tested party, including having less complex functions and no ownership of intangibles.

3. Comparability analysis in transfer pricing:
The TPO had clubbed together the transactions of marketing support services and revenue cycle management services for benchmarking, which the Assessee objected to. The CIT(A) directed the TPO to consider the foreign AE as the tested party and to verify the comparability analysis conducted by the Assessee. The Tribunal found no infirmity in these directions and upheld the CIT(A)'s order, dismissing the grounds of appeal related to comparability analysis raised by the Assessing Officer.

4. Powers of the CIT(A) under Section 251(1)(a) of the Income-tax Act:
The Assessing Officer argued that the CIT(A) exceeded his powers under Section 251(1)(a) by setting aside the case to the AO/TPO with specific directions. The CIT(A) had directed the TPO to verify the comparability analysis and compute the Arm's Length Price (ALP) afresh. The Tribunal upheld the CIT(A)'s directions, finding them within the scope of his powers and necessary for a proper determination of the ALP.

5. Use of data for comparability analysis:
The TPO had rejected the use of three-year weighted average data and data from different financial years, insisting on using current year data as per Rule 108(4). The CIT(A) found that the Assessee had provided single-year data during the proceedings and that the use of three-year data was not a determining factor for selecting the tested party. The Tribunal agreed with the CIT(A), stating that the use of three-year data and financial year differences were adjustable issues and did not invalidate the selection of the tested party.

Conclusion:
The Tribunal dismissed the appeal filed by the Assessing Officer, affirming the CIT(A)'s decision to consider the foreign AE as the tested party and to direct the TPO to verify the comparability analysis. The Tribunal also dismissed the cross-objection filed by the Assessee, deeming it premature as the issues raised were subject to verification by the TPO. The decision emphasized the importance of selecting the least complex entity as the tested party and upheld the CIT(A)'s directions for a thorough and fair transfer pricing analysis.