TP Adjustment Unsustainable Where Trading and Service Functions are Interdependent: ITAT Sets Aside Addition of ₹4.50 Cr [Read Order]

The Income Tax AppellateTribunal [ITAT] Delhi Bench has held that transfer pricing adjustment cannot be sustained where the assessee’s trading and service functions form an interdependent and integrated business model. The Tribunal accordingly set aside a transfer pricing adjustment of ₹4.50 crore made for the Assessment Year 2021–22.

This appeal was made in relation to the order on final assessment made under Section 143(3) of the Income tax Act 1961 in conjunction with Sections 144C(13) and 144B of the Act, based on the directions provided by the Dispute Resolution Panel (DRP). This matter was primarily related to the conduct of the TPO in creating a separate benchmark for the trading activities carried out by the assessee by separating its trading segment from its integrated activities which led to an adjustment of ₹4,50,32,314.

The assessee, being a wholly-owned subsidiary of Juniper Networks International B.V. is involved in the activity of distributing and marketing the internet protocol secure networking products including equipment and software. They import their goods from the associated enterprise and perform sale and after sales services within India.

The assessee had submitted that the trade and service activities were closely linked and interdependent from the commercial point of view and formed a single business activity. The assessee had further submitted that the TNMM at the entity level which was uniformly adopted in the transfer pricing study was the most suitable approach to determine the arm’s length price.

In addition to this, the assessee had also referred to its own case before the Tribunal in respect of the assessment year 2020–21 wherein an identical issue was decided in favour of the assessee.

On the contrary, the Revenue had argued that the trading and service activities were distinct from each other in terms of nature, function, risk, and asset, thereby making it imperative to have separate benchmarking for them.

The Bench consisting of C.N. Prasad and M. Balaganesh had observed that the matter fell within its earlier decision wherein the facts relating to the assessment year under consideration were found to be identical.

Accordingly, the Tribunal allowed the assessee appeal on this ground and held that the entity level TNMM adopted by the assessee was to be accepted rendering the transfer pricing adjustment unsustainable.

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