ACIT Vs e4e Business Solutions India Pvt. Ltd. (ITAT Bangalore)
TPO should choose the internal comparable in controlled transaction as against an external comparable
The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output. assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-â-vis its counterpart i.e. external comparable.
ITAT uphold the orders of the CIT(Appeals) applying internal TNMM method for determination of the ALP.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
ITA Nos.1071 & 1072/Bang/2018 are appeals by the revenue against the common order dated 30.12.2017 of the CIT(Appeals)-III, Bangalore relating to assessment year 2004-05 & 2005-06. The assessee has filed Cross Objections in CO No.97/Bang/2018 against the revenue’s appeal for AY 2004-05 i.e., ITA No.1071/Bang/2018.
2. The main issue that needs to be adjudicated in the appeals of the revenue is as to, whether the CIT(Appeals) was justified in directing the AO to apply the internal Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) for benchmarking the international transactions entered into by the assessee with its Associated Enterprise (AE). The factual background under which the aforesaid issue arises for consideration is that the assessee rendered Information Technology enabled Services [ITeS] to its AEs and therefore the price that the assessee received in rendering such services has to satisfy the arm’s length price (ALP) test as laid down u/s. 92 of the Income-tax Act, 1961 [the Act]. The TPO to whom reference was made by the AO under the provisions of section 92 of the Act for determination of the ALP passed an order dated 15.12.2006 in which he determined the ALP of the international transactions by selecting the following comparable companies:-
