TaxTMI 
TaxTMI 
2015 (12) TMI 1811
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....against the income of Rs. 78,048 returned by the appellant. 2. That the Assessing officer erred on facts and in law in making addition of Rs. 3,06,25,340 of the alleged difference in the arm's length price of the 'international transactions' of provisions of provision of software design and development services on the basis of the order passed under section 92CA(3) of the Act by the TPO. 2.1 That the Assessing officer/TPO erred on facts and in law in applying additional filters of percentage of wages to sale, persistent losses, declining revenue and onsite revenue not appreciating that the selection or rejection should be based on FAR analysis and not on financial results. 2.2 That the Assessing officer/TPO erred on facts and in law in applying inconsistent approach by eliminating los making companies or companies with declining revenue without eliminating the companies having significantly high margins or high growth rate in sale. 2.3 That the Assessing officer/TPO erred on facts and in law in relying upon the information obtained under section 133(6), not appreciating that such information is ....
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....ect of the international transactions of provision of software development services to Interra IT Inc. The margin earned by the assessee is of cost plus 8% on provisions of services to its AE. The assessee company in order to determine the arm's length price of international transactions applied Transactional Net Margin Method ("TNMM") as the most appropriate method. For application of TNMM, operating profit/total cost ratio was benchmarked with operating profit margin i.e. operating profit/total cost of 8.64% earned by the 57 comparable uncontrolled enterprises. Since the operating profit ratio of the assessee on controlled transactions was 8.00% and the same fell within the 5% range of 8.64% earned by the comparable companies, the international transactions of provision of software development services entered into by the assessee with Interra IT were therefore considered at arm's length. 4. During the course of TP assessment proceedings, the Transfer Pricing Officer's (hereinafter referred to as 'TPO') further carried out fresh search of comparables and selected a set of 19 comparable companies, earning a mean operating margin of 26.16% as ....
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....rd a chart, which is as under:- Particulars Offshore (USD) Offshore (INR converted at 39.90/USD) Remarks Revenue charged by AE to third party customer $6,674,963 26,63,31,024 Cost-Direct (Value of invoice raised by the appellant on the basis of cost plus 8% markup) $6,545,000 26,11,45,500 Rs. 11,08,54,524 raised by Interra Information and Rs. 15,07,01,606 raised by the appellant being 98.05% of the total revenue charged from third party customer Balance revenue retained by AE $129963 51,85,524 AE has retained only 1.95% of the total revenue charged from end customer Cost-G&A (cost incurred by AE, Interra Inc., USA) $1,219,282 4,86,49,352 Profit ($1,089,318) (4,34,63,788) AE has only incurred loss Profitability % -14.03% Particulars Amount (INR) Invoice raised by Interra Information Technologies India and Appellant 26,11,45,500 Addition made by the TPO in the case of Interra Information Technologies India (Disputed in ITA No. 6354/D/2012) 2,03,77,077 Addition made by the TPO in the case of Appellant (Disputed in ITA No. 5620/D/20....
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...., general and administrative expenses 3,468,169 Income/(Loss) from the operations 338,340 Further, the audited profit and loss account for the years ended 31-12-2007 and 31-12-2008 of Interra Information Technologies, Inc. is extracted as hereunder: (USD in thousand) Particulars Year ended 31.12.2007 31.12.2008 Net Revenues 19,939 19091 Cost of revenues 13,533 11892 Gross profit 6,406 7,199 Selling, general and administrative expenses 5,401 Income/(Loss) from the operations 1,005 1,108 From the above, it is evident that the associated enterprises has incurred a mere return of 1.81% on its cost and has in fact earned a loss of 16.23% on its offshore activities, thus it may be safely concluded that there was no transfer of profit by the assessee to the associated enterprises in other jurisdictions. The Hon'ble Delhi High Court in the case of Sony India P. Ltd. vs. CBDT (Delhi); 288 ITR 52 has at pages 61-62, observed as under: "The concept of transfer pricing leading to tax avoidance has been acknowledged in the Act only recent....
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....r, it would be appreciated that the adjustment computed as aforesaid in the order passed under section 92CA(3) of the Act at best cannot exceed the margin, i.e., gross revenue received from the end customers less amount paid to the assessee retained by the associated enterprises in respect of international transactions. In present case, the associated enterprise has only incurred loss in respect of the international transactions undertaken with the assessee, as under: Particulars Offshore Total Revenue $6,674,963 $18,986,509 Cost-Direct $6,545,000 $15,180,000 Cost-G&A $1,219,282 $3,468,169 Profit ($1,089,318) $338,340 Profitability% -14.03% 1.81% Reliance is placed in this regard on the recent decision of Delhi Bench of the Tribunal in the case of Global Vantedge P. Ltd. vs. DCIT (ITA No. 2763 & 2764/Del/09) wherein the Hon'ble Tribunal held that adjustment on account of arm's length price of international transactions cannot exceed the maximum arm's length price, i.e., the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount rec....
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....nal from the net amount retained by the associated enterprise, expenses incurred in performing their operation/rendering marketing services, is to be permitted to be retained by the associated enterprise. In other words, the adjustment made by the TPO can, in no case, exceed the net profit margin earned by the associated enterprise. In view of the aforesaid too, it would be appreciated that the associated enterprise has only incurred loss from the transactions undertaken with the assessee. There cannot be allegation as to transfer pricing and the adjustment made by the TPO is liable to be deleted." 13. However DRP/AO have not accepted the above contention. We take note that as per the chart placed on record AE has charged revenue of Rs. 26.63 crores from the customer, whereas value of ALP as determined by the TPO considering the adjustment in the case of appellant and M/s Interra Information Technologies India (P) Ltd. is Rs. 31.21 crores. Thus total value of ALP exceeds the revenue charged by AE from customer. Moreover it is also noticed that AE has incurred loss of Rs. 4.34 crores and there is no margin retained at the end o....