TaxTMI 
TaxTMI 
2011 (2) TMI 1294
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....Transfer Pricing Officer and the corresponding addition made to the total income of the assessee and, in this manner, the impugned assessment has been framed against which the assessee is aggrieved, hence, in appeal. The grounds of appeal raised by the assessee are as under : That on the facts and circumstances of the case, and in law : 1. The assessment order passed in pursuance to the directions issued by the learned Dispute Resolution Panel (learned DRP) is a vitiated order as the learned Dispute Resolution Panel erred both on facts and in law in confirming the addition made by the learned Assessing Officer to the appellant's income by issuing a non-speaking order without appropriate application of mind. 2. The learned Dispute Resolution Panel erred both on facts and in law in confirming the addition of Rs. 4,44,46,736 by holding that the appellant's international transaction in the nature of provision of software development services does not satisfy the arm's length principle as envisaged under the Act and in doing so the learned Dispute Resolution Panel has grossly erred in agreeing with the learned Transfer Pricing Officer's (TPO) action of : 2.1 ....
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....ntative industry set for benchmarking the operating profit margin earned by the appellant, and further, thus, demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the appellant. 2.10 Ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits from provision of software development services and, therefore, would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions. 3. The learned Dispute Resolution Panel erred both on facts and in law in confirming the addition of Rs. 12,39,564 by holding that the appellant's international transaction in the nature of provision of marketing support services does not satisfy the arm's length principle as envisaged under the Act and in doing so the learned Dispute Resolution Panel has grossly erred in agreeing with the learned Transfer Pricing Officer's action of : 3.1 Disregarding the arm's length price (ALP) and the methodical benchmarking process carried out by the as....
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....pany is an Indian company and almost the entire share capital of the assessee-company is owned by Avaya International LLC, a Delaware Corporation. During the year, the assessee in order to benchmark the international transactions in software development and in market support service, identified transactional net margin method as the most appropriate method with net profit based on cost (OP/OC) as a profit level indicator (PLI). The margin of the assessee is 18.43 per cent. in software development segment and 5.24 per cent. in market support service segment. The Transfer Pricing Officer and the Assessing Officer both have accepted transactional net margin method with OP/OC as a profit level indicator as the most appropriate method for benchmarking the international transactions. However, instead of relying on the current year financial data of the comparables, the assessee had used weighted average margins of three years to benchmark the international transactions and in place of that the Transfer Pricing Officer only relied on the current year's data of the comparables for determining the arm's length price by relying on the decision of the Income-tax Appellate Tribunal in ....
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....Indiacom Ltd. 12.70 2. TSR Darashaw Ltd. 16.56 3. MCS Ltd. 9.56 4. Empire Industries Ltd. 15.78 Mean 13.58% He has worked out the addition of Rs. 12,39,564 on this account as follows : Operating cost 1,48,54,086 OP/OC 13.58% Margin 20,17,184 Arm's length price 1,68,71,270 Price charged by the assessee 1,56,31,706 Difference 12,39,564 % of difference with ALP 7.34% The first and foremost contention of the learned authorised representative against the order passed by the Dispute Resolution Panel is that the objections of the assessee have been rejected summarily without discussing in detail the reasons for which those objections have been rejected. He submitted that the assessee has valid reasons on the basis of which it could be shown that the arm's length price computed by the Transfer Pricing Officer is not as per the provisions of the Act. He submitted that so as it relates to the determination of the arm's length price in respect of software development segment, the main objection....
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....able companies and should be excluded for the determination of the arm's length price." The other objection raised by the learned authorised representative is regarding the factual error committed by the Transfer Pricing Officer. He submitted that the Transfer Pricing Officer has adopted the wage cost/sales ratio of the companies falling within the range of 30 per cent. to 60 per cent. He submitted that out of rejected comparables the following four companies were having ratio between the said range and those have wrongly been rejected by the Transfer Pricing Officer. He referred to the following table to describe that those four companies are falling within the range of 30 per cent. to 60 per cent. : Company name Wages/sales computed by the learned Transfer Pricing Officer Correct wages/sales ratio Ref. Melstar Information Technologies Ltd. 60.17% 57.88% Annual report SQL Star International Ltd. 60.64% 54.95% Annual report Sasken Communication Technologies Ltd. 64.31% 54.25% Annual report Satyam Computer S....
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....tion and, he, in this regard, referred to the page 471 of the paper book. Thus, he submitted that the said comparable has wrongly been rejected by the Transfer Pricing Officer and if the said comparable is taken into consideration along with the four companies taken by the Transfer Pricing Officer, then, the mean margin would be around 13.5 per cent. against which the assessee's margin already exceeds. Arguing on marketing support services, it was submitted by the learned authorised representative that three comparables, namely, Cotton Textiles Export Promotion Council, Export Promotion Council for Handicrafts and IL & FS Academy For Insurance & Finance Ltd. have wrongly been rejected by the Transfer Pricing Officer. In the alternative, he submitted that even if rejection of these three parties is upheld, then, also, the assessee is entitled to benefit of +/- 5%. range as mentioned in the proviso to section 92C(2) of the Act and he, in this regard, referred to the decisions of the Income-tax Appellate Tribunal in the case of Sony India P. Ltd. v. Deputy CIT [2009] 315 ITR (AT) 150 (Delhi), Development Consultants P. Ltd. v. Deputy CIT [2008] 115 TTJ (Kol) 577 and Cordys R & ....
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....which the international transactions were admittedly entered into by the assessee with its associate enterprises. Therefore, the second filter is also upheld. Against the third filter, it is the case of the assessee that no reason has been given by the Transfer Pricing Officer by adopting the wage to sale ratio between 30 to 60 per cent. For this also the learned Dispute Resolution Panel has assigned the reason and it is found that the assessee's wage/ sale ratio is 46.96 per cent. and if the same is taken into consideration, then a reasonable view will be that Añ 15 per cent. ratio adopted by the Transfer Pricing Officer to filter the comparables is reasonable. Thus, we see justification in the order of the Dispute Resolution Panel and the Transfer Pricing Officer to hold that wage/sale ratio has been rightly determined at between 30 per cent. to 60 per cent. However, the objection of the assessee is regarding wrong calculations made while applying this filter with respect to aforementioned four parties which are described in paragraph 11 of this order and it has been claimed by the assessee that their ratio also falls between 30 to 60 per cent. and, therefore, they ....
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....pinion that they cannot be excluded as the assessee itself has taken those parties as comparables and now the assessee cannot plead their exclusion simply for the reason that their results are going against the assessee. Therefore, such contention of the assessee is rejected. Now, coming to the market support services segment, the assessee has worked out the mean margin of seven comparables at (ƒ_") 0.26 by comparing the results of seven parties on the basis of immediate preceding year and it is the case of the assessee that out of those seven parties three have wrongly been rejected as comparable on mere conjectures and surmises. The exclusion of Cotton Textiles Export Promotion Council has been supported by the Transfer Pricing Officer on the ground that the said concern is an autonomous, non-profit making export promotion body which derives its income from membership fee, advertisement, market development and assistance and interest and, thus, he has held that it is not a commercial organisation. The assessee has not shown any credential that such observations of the Transfer Pricing Officer are incorrect. Therefore, we uphold the rejection of Cotton Textiles Export Prom....