Income Tax Act, 1961

--Transfer pricing--Computation of ALP External TNMM vis-a-vis internal TNMM--Assessee-company was engaged in rendering software development services to AE as well as non-AE (domestic client). Assessee adopted transaction net margin method (TNMM) to justify price charged in international transaction with its AE. Based on comparison of net margin earned from AE and non-AE (Internal TNMM), assessee concluded that its transaction with AE was at arm's length price. TPO, however, rejected assessee's TP Study and conducted that external TNMM would be adopted, instead of internal TNMM, which resulted into adjustments in ALP transfer pricing issue. Held: Assessee had produced copies of agreement, time sheet details, invoices and billing rates relating to AE and non-AE segments on sample basis in months of April, October and December. Assessee had also filed detailed functional similarity as well as methodology of apportionment of expenses. However, it was further, noticed that in transfer pricing order, there was no discussion about internal TNMM, on basis of which was assessee had stated that international transactions were at arm's length. There was no reason as to why internal comparables have not been adopted, therefore, assessing officer/TPO is directed to adopt internal TNMM, instead of external TNMM. However, the issue is restored to the file of the assessing officer/TPO to verify cost allocation and PLI and margin computation between software services rendered by assessee to its AE vis-a-vis the non-AE and to determine operative profit/operating cost and the margin thereof and to conclude as to whether international transaction with that of AE was within arm's length range profit under the TP regulation.