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2011 (2) TMI 1294

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....responding 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 Disregarding the arm's length price (ALP....

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....argin 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 assessee in the Transfer Pricing documentation maintained by it in t....

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....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 the case of Customer Services India P. Ltd. v. Asst. CIT [2009] 30 SOT 486 (Delhi) and....

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....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 of the assessee is regarding inclusion of Infosys Technology Ltd. and Wipro Ltd. He submitted that comparison has to be made with the like concerns. The turnover of those concerns were in the vicinity of Rs. 9,028 crores of Infosys Technology Ltd. and Rs. 10,264 crores in respect of Wipro Ltd. as against the turnover of the a....

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....panies 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 Services Ltd. 61.28%   54.28%   Annual report   He submitted that if those four companies are also included in the comparables, then, the mean margin will come to 20.94 per cent. which is as per the following Table : Operating profit margin of companies whose wages to sales ratio was incorrectly computed by the learned Transfer Pricing Officer along with the final comparable set used by the Transfer Pricing Officer. Particulars   OP/TC   Melstar Information Technologies Ltd. 5.14....

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.... 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 & D (India) P. Ltd. v. Asst. CIT [2011]-TII-01-ITAT-HYD-TP. Thus, he submitted that looking from any angle, the adjustment made by the Transfer Pricing Officer has no substance and the profit margin declared by the assessee are according to the arm's length price and, therefore, the additions made in the assessment order should be deleted. On the other hand, relying upon the order of the Transfer Pricing Officer and the Dispute Resolution Panel, it was submitted by the learned Departmental representative that the Transfer Pricing Officer has provided detailed reasons for arriving....

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....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 have wrongly been excluded. We found force in such contention of the learned authorised representative. We, therefore, hold that if the wage/sale ratio of the aforementioned parties, as mentioned in paragraph 11 of this order, fall within the range of 30 per cent. to 60 per cent., then those parties should be included in the list of comparables to compute the mean margin. It is the case of the assessee that if those four parties are taken into consideration, then, the mean ratio will come to 20.94 per cent. As against that the mean margin of the assessee is 18.43 per cent. and it falls with....

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....arable 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 Promotion Council as comparable for this segment. For Export Promotion Council for Handicrafts Ltd., it has been observed by the Transfer Pricing Officer that this is an organisation under Ministry of Textiles, Government of India. It is also a non-profit organisation established under the EXIM Policy of Government of India and it also derives income from members as subscription, participation in fairs and exhibitions and grants-in-aid for various activities from the Development Commissioner, Ministry of Commerce. Thus, this concern also is a noncommercial organisation. The assessee has not brought any....