The Chennai Bench of the Income Tax Appellate Tribunal (ITAT)has held that the CUP method can be applied for benchmarking international transactions when no change occurred in the previous year.
M/s.Mega Soft Ltd,the assessee company is engaged in the business of providing IT consulting services to its AEs XIUS Corp, USA, Megasoft Consultants Sudan Bhd and non-AEs like Tata Communications, Canada. The return of income for the AY 2012-13 was filed on 22.12.2012 declaring a total income of Rs.1,00,18,450. The assessee has entered into various international transactions with its AEs. The assessee has selected CUP as the most appropriate method and benchmarked transactions with its AE and claimed to be a tested party.
The TPO rejected the CUP method adopted by the assessee and has adopted TNMM as the most appropriate method. The assessee has challenged the rejection of CUP as the most appropriate method and selection of TNMM to benchmark international transactions. The assessee had also challenged the computation of operating margins by considering two extraordinary items of bad debts written off and forex fluctuation loss.
The TPO has selected 9 comparables with an average margin of 18.27%. The TPO had also re-worked PLI of the assessee after considering bad debts written off and forex fluctuation loss as operating expenses and has worked out OP/OC @5.01% and then, compared the margin of the assessee with comparables and made a TP adjustment of Rs.4,40,89,432/- towards AE sales
It was contended that the DRP erred in rejecting CUP as the most appropriate method without appreciating the fact that for the earlier two assessment years, the assessee has adopted CUP as the most appropriate method and the TPO has accepted the CUP method without any adjustments towards international transactions with its AEs.
It was evident that the assessee has followed the CUP method consistently for the last several years including immediately preceding AYs 2010-11 & 2011-12 which was also admitted by the TPO. It was alleged that the assessee could not file necessary details of working of quantity and quality of services rendered to AE with the third-party non-AE suppliers.
A Coram of Shri V Durga Rao, judicial member and Shri G Manjunatha, accountant member observed that the DRP without appreciating the above facts has simply upheld TNMM as the most appropriate method and upheld the TP adjustment as suggested by the TPO. The Tribunal reversed the findings of the DRP and directed the TPO to consider CUP as the most appropriate method to benchmark international transactions with its AEs. Further directed the TPO to delete the addition made towards TP adjustment made towards AE sales.
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