Delhi ITAT Restricts Verizon Transfer Pricing Adjustment, Says Revenue Cannot Reject Consistent Model

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the Transfer Pricing Officer (TPO) could not reject a taxpayer's limited risk model without citing any comparable uncontrolled transactions and partly set aside a transfer pricing adjustment of Rs. 83.49 crore against Verizon Communications India Pvt. Ltd., restricting the adjustment to Rs. 23.81 crore.

A Bench comprising Accountant Member S. Rifaur Rahman and Judicial Member Anubhav Sharma upheld the company's claim for deduction under Section 80-IA and deleted the disallowance under Section 40(a)(i) relating to payments made to foreign telecom operators.

The Bench observed that “there cannot be a situation where the Revenue cherry-picks the results” from the model.

The taxpayer, a subsidiary of Verizon Asia Pacific Holdings Pvt. Ltd. and part of the Verizon Group, provides telecommunication services in India. For Assessment Year 2012-13, the TPO rejected its benchmarking under the Transactional Net Margin Method (TNMM) and substituted it with the “Other Method,” resulting in an upward adjustment.

The taxpayer had adopted a Limited Risk Model (LRM) under which it was assured the higher of 11% return on sales or 14% mark-up on value-added expenses. In years where profitability fell short, the associated enterprise made good the shortfall. In the relevant year, excess profits were passed back to the group entrepreneur under the same model.

The Bench observed that the targeted margin offered to the OpCos is growth-oriented and noted that the LRM had been adopted by the taxpayer/group consistently and accepted by the TPO in previous years. With no change in facts or circumstances, there was no reason to reject it for the year under consideration.

The Bench held:

“As held in the case of Radhaswami Satsang (supra), where a fundamental aspect permeating through different assessment years has been found as a fact and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year.”

The Tribunal further concluded:

“Hence, in our view the consistent result has to be applied in the given case also; it cannot be a situation where the Revenue cherry-picks the results.”

On a separate disallowance of Rs. 2,42,300 under Section 40(a)(ia) for non-deduction of tax on certain expenses.

Accordingly, the Bench remanded the matter to the Assessing Officer for further verification.