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TaxTMI 
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2026 (5) TMI 32
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....ference was made to the TPO for determination of the 'Arm Length Price (ALP) of international transactions carried out by the assessee. The TPO vide order dated 25.10.2023 passed u/s 92CA(3) of the Act made adjustment of Rs. 3,37,57,055/- to the Arm's Length Price with respect to international transaction carried out by the assessee with its AEs. Consequently, the AO passed the draft assessment order dt. 13.11.2023 wherein the ALP adjustment made by TPO is proposed to be added to the total income of the assessee and the total income is proposed at Rs. 3,40,40,376/-. 3. Against the draft assessment order, assessee filed objections before the Ld. Dispute Resolution Pannel (ld. DRP) wherein ld. DRP has confirmed the findings of the TPO/AO in terms of its order dated 07.08.2024 passed u/s 144C(5) of the Act, however, ld. DRP issued certain directions regarding comparables selected by TPO. Thereafter, the AO passed the final assessment order on 28.09.2024 wherein the addition of Rs. 3,53,59,751/- is made towards the TP adjustments on international transactions as proposed by TPO in the order giving effect to the directions of ld. DRP. 4. Against the order of ld. DRP, asses....
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....d. DRP has erred in not providing specific directions to the Id. TPO/AO, as required under Section 144C, and leaving it to the Id. TPO to ascertain the comparable companies. The action of the Id. DRP is illegal, unjustified, and arbitrary, contrary to the legal position as set out in Section 144C of the Income Tax Act, 1961." 5. Since all the grounds of appeal taken by assessee are with respect to single issue of transfer pricing adjustment on the transaction with its AEs on the purchases of software, therefore, they are taken together for consideration. The ld. AR for the assessee submits that the assessee sold subscriptions of Meltwater Software License which includes online news-monitoring services, media-analysis and trend-detection tools, and related news-feed products, developed by its AE which handles marketing, sales, and supports. Ld. AR submits that assessee is working as a reseller and is very low risk provider as it has not made any value addition to the product purchased. Ld. AR submits that assessee company has taken Transaction Net Margin Method (TNMM) as most appropriate method (MAM) and further applied Berry Ratio as the profit level indicator (PLI). However, be....
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....ed. 1.2. Products sold: Assessee company sells subscriptions of Meltwater's software licenses. These include online news-monitoring services, media- analysis and trend-detection tools, and related news-feed products developed by its AE (Meltwater GmbH) which handles marketing, sales, and support [PB : 16]. 1.3. Clause wise analysis of the Reseller Agreement [PB 14-19] which establishes assessee a "low risk service provider" is as under: Clause Terms of the Agreement Analysis/Observations Section 2.01 - Appointment Meltwater India appointed as "non- exclusive value added reseller in the Territory" [PB: 17] Uses the term "value added" but doesn't define minimum standards or requirements Section 2.03 - VAR Services Lists 12 specific services including: Target research, Sales presentations, Market research, Pricing negotiation, Customer contracts, Product delivery, Invoicing & collection, Customer support, Telephone support, Additional services [PB: 17] Services listed are primarily sales and administrative functions rather than product enhancement or customization Section 3.01(a) - Technology Rights "Non-exclusive, royalty-....
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....ets: MIPL uses its own infrastructure, premises, facilities, furniture, fixtures, computers, vehicles etc. for the purpose of business in India. ii. Intangible Assets: All intellectual property rights, know-how, brand etc. are owned by Meltwater News International GmbH. MIPL does not own any intangibles. 2.3. Risk Analysis Risk Analysis Risk Assumed MIPL Meltwater Gmbh Market Risk ✓ ✓ Research and Development Risk x ✓ Quality Risk x ✓✓ Credit Risk x ✓✓ Manpower Risk ✓ ✓ Foreign exchange fluctuation Risk ✓✓ x ✓✓Denotes significant risks, ✓ denotes lesser significant risks, x denotes non-performance of risks. 3. Chain of Events: Chain of events in relation to the impugned proceedings is as under: S. No. Particulars Date 1. Order issued by TPO u/s 92CA(3) of the Act 25.10.2023 2 Draft order under section 144C(1) of the Act 13.11.2023 3. Objections filed before DRP in Form 35A 12.12.2023 4. Order of Hon'ble DRP u/s 144C(13) of the Act 31.08.....
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....third- party customers in India. No technical modification, development, or marketing service is performed on the software product. Therefore, the assessee squarely falls within the functional profile of a reseller/distributor, and RPM is the correct method as per Rule 10B(1)(b) of the Income-tax Rules, 1962. 7. Reliance is placed on the below mentioned judgements in this regard: (i) Matrix Cellular International Services (P.) Ltd [2018] 90 taxmann.com 54 (Delhi) [CLC Page 79] (ii) Burberry India (P.) Ltd. [2024] 169 taxmann.com 6 (Delhi) [CLC Page 88] (iii) L'Oreal India (P.) Ltd. [2015] 53 taxmann.com 432 (Bombay HC) [CLC Page 90] (iv) Horiba India (P.) Ltd. [2017] 81 taxmann.com 209 [Delhi ITAT] [CLC Page 99] (v) Alcoa India (P.) Ltd. [2020] 114 taxmann.com 631 [Delhi ITAT] [CLC Page 104-105] (vi) Harman Connected Services Corporation India (P.) Ltd. [2022] 141 taxmann.com 455 [Mumbai ITAT] [CLC Page 118] In view of the above, if RPM is considered to be the most appropriate method no adjustment is required to the income of assessee. GROUND NO. 1-3: INCORRECT REJECTION OF BERRY RATIO AS PLI FOR BENCHMA....
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....2 of this submission. 4.4 TPO also replaced the assessee's PLI (OP/VAE) with OP/OR and recomputed the ALP as follows (PB 47-48): Particulars Amount (Rs. ) Operating Revenue (A) 17,61,20,308 Mean OP/OR of comparable (B) 17.61% Arm's Length Margin (C = A x B%) 3,10,14,786 Arm's Length Cost (D = A - C) 14,51,05,522 Cost as per assessee's books (E) 18,04,65,273 Difference (E - D) 3,53,59,751 4.5 Further, assessee in it's working provided the bifurcation of operating and non-operating expense, which has never been rejected or objected by TPO. However, still while calculating the margin above it has considered the entire expense except bank charges as operating expense and calculated margin accordingly. 5. It is submitted that TPO/DRP rejected the claim of assessee without appreciating the fact that assessee is not a service provider i.e. it does not uses the software to provide service rather it sells the subscription of software purchased from it's AE and in such circumstances berry ratio is the most appropriate PLI. 6. When Berry Ratio is Appropriate: 6.1 Limited-Risk/Strippe....
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...., TPO was incorrect in applying OP/OR as the PLI considering the nature of service rendered by the assessee company. 11. Berry Ratio measures the return generated on operating efforts. Operating expenses represent the resources deployed in performing distribution functions. COGS represents the value of goods traded and is NOT an operating expense. Including COGS in the denominator would distort the ratio and defeat the purpose of measuring return on operational activities. 12. Reliance in this regard is placed on below mentioned judgement: 12.1 Sumitomo Corporation India (P.) Ltd. [2016] 71 taxmann.com 290 (Delhi) [CLC Page 12] 12.2 Mitsubishi Corporation India (P.) Ltd. [2014] 50 taxmann.com 379 (Delhi - Trib.) [CLC Page 43] In view of the above, TPO/DRP erred in rejecting the berry ratio (as PLI) adopted by the assessee company, and, thereafter, rejecting comparable companies as considered by the assessee for the purpose of benchmarking. Accordingly, entire TP adjustment deserves to be deleted. GROUND NO. 5: INVALID DIRECTION OF THE DRP FOR FRESH BENCHMARKING - CONTRARY TO SECTION 144C(13) 1. It is respectfully submitted th....
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.... DRP) were justified and should be upheld by the Hon'ble ITAT. As desired by the Hon'ble Bench, the following written submission is made in the matter, which may kindly be taken into consideration for the purpose of deciding the instant appeal. Ground No. 1: The Ld. DRP erred in confirming the action of the Ld. AO/TPO in making adjustment of Rs. 3,53,59,751/- on account of international transaction. Ground No. 2: The Ld. DRP erred in confirming the action of the Ld. AO/TPO in rejecting OP/VAE as the PLI under TNMM and selecting OP/OR as the PLI. Ground No. 3: The Ld. DRP erred in confirming the action of the Ld. AO/TPO for carrying out bench marking analysis with companies that were not comparable with the functioning of the assessee and rejecting the comparables provided by the assessee. Ground No. 4: The Ld. DRP erred in confirming the action of the Ld. AO/TPO by including the cost of software and still considering the assessee as marketing support service provider instead of trader of software. Ground No. 5: The Ld. DRP erred in not providing specific directions to the Ld. AO/TPO as required u/s 144C and leaving it to the Ld. ....
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.... such margin calculation does not reflect the financial situation of the assessee correctly as payment of VAR fee has to be in the cost base to check the true margin of the assessee and compare it with comparables. Also, the assessee has not adjusted margins of the comparables in a similar way to make them truly comparable as these comparables may not work on VARIC subscription models. This is in violation of rule 10B(1)(e) of the Income-tax Rules, 1962. 1.4 As regards rejection of certain comparables taken by the assessee, the TPO has given detailed reasons in her show cause notice on page 7-9 and at para 13 on page 16-18 of her order which includes rebuttal of the assessee's contentions. Inclusion of certain comparables by the TPO has been discussed at length at para 14 on page 18-20 of her order which includes rebuttal of the assessee's contentions and in her show cause notice on page 9-10. 1.5 The assessee's contention of incorrect understanding of its business has been dealt with by the TPO at para 9 and 10 on page 14-15 of her order. As discussed above in para 1.2 above, as per the assessee's own agreement (Value Added Reseller Agreement), VA....
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.... (e) Negotiate and enter into subscription contracts with customers; (f) Deliver Meltwater Products and related technology and documentation; (g) Deliver all other deliverables in accordance with subscription contracts; (h) Invoice customers accordingly; (i) Collect all Accounts Receivables; (j) Support customers for the use and integration of the Meltwater Products; (k) Provide telephone support as required to customers; and (l) Provide any additional services as may be requested by customers. (Emphasis supplied) 1.9 The DRP has dealt with the assessee's contention that VAR fee should not be part of operating expense at paras 5, 6 7 and 8 on page 11-12 of its order dated 31.08.2024. The DRP in para 6 on page 12 of its order has held that a reference to rule 10TA(j) of the Income-tax Rules, 1962 which defines "operating expense" is the most proximate source for the guidance on the issue. The DRP has further held that it has been rightly observed by the TPO that VAR fee is directly related to operations of the assessee and it is required to be treated as operating in nature. Further, on the b....
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....its foreign AE. It has entered into a "Value Added Reseller Agreement" with its Switzerland based AE wherein "Value Added Reseller Services" provided by the assessee have been defined under section 2.03 under Article 2 of the Agreement. The "Value Added Reseller Services", as defined under section 2.03 of the Agreement, have been discussed in the above para 1.8. Considering the nature of services provided by the assessee as highlighted in the aforesaid para 1.8, the assessee cannot be termed as a pure trader by any stretch of imagination. 8. The Ld. AR vide its letter dated 05.11.2025 filed rejoinder to the submissions made by Ld. CIT DR which reads as under: REJOINDER TO SUBMISSION OF LD. DR During the course of hearing before the Hon'ble Bench, the Id. Departmental Representative ("DR") raised two contentions, objecting to the adoption of the Resale Price Method (RPM) as the Most Appropriate Method. The same are addressed hereunder in the form of a rejoinder :- Contention 1 - Assessee did not raise the plea for selecting Resale Price Method before the Id. DRP. 1. It is respectfully submitted that the assessee has, in fact, raised the plea for ....
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....alue added reseller in the Territory" [PB: 17] Uses the term "value added" but doesn't define minimum standards or requirements Section 2.03 - VAR Services Lists 12 specific services including: Target research, Sales presentations, Market research, Pricing negotiation, Customer contracts, Product delivery, Invoicing & collection, Customer support, Telephone support, Additional services [PB: 17] Services listed are primarily sales and administrative functions rather than product enhancement or customization Section 3.01(a) Technology Rights "Non-exclusive, royalty-free, revocable, non-transferable right to use and display the Meltwater Technology solely for purposes of performing value added reseller functions" [PB: 17] No right to modify, enhance, or develop the technology - only to display and use it Section 3.02 - No Licenses Granted "Nothing in this Agreement shall be construed as providing Meltwater Seller a license for the right to make, have made, use, sell, offer to sell, import, perform, display, or reproduce any Meltwater Technology" [PB: 17] Explicitly prohibits any modification or enhancement of the product Article 4.01 - IP Ownership....
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....ed in the DRP's order is reproduced hereunder: "On facts and in law, without prejudice, if the VAR Fees is considered to be as Operating Expense then the assessee can be classified as the "Trader of Software" instead of "Marketing Support Service Provider" Accordingly, the Id. AO/Ld. TPO should consider the comparables related to Trading of Software instead of Marketing Support Service. As the assessee did not raise the ground of RPM before the lower authorities, the undersigned strongly objects to the same at this stage. Any consideration of this ground/claim at this stage would be violation of the principles of natural justice to the lower authorities. It is requested that the Hon'ble ITAT may dismiss this ground/claim accordingly. Without prejudice to this, the rebuttal of the assessee's contention regarding "Trader of Software" has been discussed elaborately in the aforesaid paras 1.12 and 1.13. Further, considering the functional analysis of the assessee, TNMM is the most appropriate method with OP/OR as the PLI which has been discussed at length in the aforesaid paras. Therefore, even on merits also, the assessee's claim of adoption of RPM as....
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....actually incorrect. The said agreement is fully executed, dated, and is available in the Paper Book at Pages 14-29 (specifically page no. 14), as referred to in the Gist of Submissions already on record. 3 On Resale Price Method (RPM) as a "New Plea" (Para 1.15 of Id. DR Submission): It is submitted that the assessee, in its proceedings before the Id. Dispute Resolution Panel (DRP), had alternatively pleaded for the adoption of the Resale Price Method (RPM) vide Ground No. 7 of its objections. The detailed submission, rationale, and benchmarking working for RPM were explicitly provided in Form 35A at pages 61-62 and relevant extract was also mentioned at earlier rejoinder page no.1 4 The Id. DR has erred by placing reliance on the title of the agreement ("Value Added Reseller") rather than its operative substance. It is a settled legal principle that substance must prevail over form. 5 The Id. DR has considered the routine sales and administrative functions listed in Section 2.03 of the agreement (e.g., "Sales presentations" "Invoicing & collection") with product "value-addition." These are standard, necessary activities of any reseller or distributor, no....
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....ited risk involvement, and therefore, TNMM should be the MAM and applied Berry ratio as PLI deserves to be accepted. From the facts, it could be seen that the assessee is selling subscriptions developed by its AE, where assessee receives orders from unrelated parties and on order-to-order basis has purchased the software and supplied it tot eh customer, thus, the assessee is a trader only. However, DRP held as the assessee provides marketing support services and the software is a medium used for marketing. These observations of the DRP are incorrect so far as the business of the assessee as a trader of subscriptions of software license. In the process of sale of subscription of software license, the software is not a medium rather it is the product itself, and assessee is providing license to use it without having any access to modify or adding any value to the product i.e. software which was developed and supplied by its AE. Assessee's income limited to the margin earned from the sale of subscription only. Under these circumstances, the Berry ratio taken by the assessee for PLI and TNMM as MAM for working out the arms' length price should be accepted. 12. The Hon'bl....
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.... the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them." 13. The coordinate Delhi bench of Tribunal in the case of Adm Agro Industries Kota & Akola P. Ltd, Vs. ACIT, Circle-1(1), New Delhi in ITA No. 2281/Del/2022 vide order dt. 13.06.2022 under similar circumstances held the berry ratio applicable for PLI by making following observations: 22. At this stage, it is necessary to look into the relevant statutory provisions relating to determination of ALP of international transactions with AEs. Section 92 of the Act provides for computation of income having regard to the ALP of international transactions with AE. Section 92C of the Act provides the methods for computation of ALP. TNMM is one of the approved....
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....penditure incurred by the assessee. The operating expenditure incurred by the assessee effectively captures the functions performed and risk undertaken by the assessee. Thus, in a case where assessee uses an intangible as a part of its business, berry ratio may not be an appropriate PLI, as the value of such intangible would not be captured in the operating cost. Similarly, berry ratio is not appropriate PLI for determining the ALP in cases where the assessee may be having substantial fixed assets since, the value added by such assets would not be captured in berry ratio. However, it can be applied where the operating expense adequately represent all functions performed and risks undertaken. Thus, the Hon'ble High Court held that berry ratio is effectively applied only in case of stripped down distributors who have no financial exposure and risk in respect of the goods distributed by them. Various other decisions cited by learned Sr. counsel lay down the ratio that Rule 10(B)(1)(e) does not completely rule out applicability of berry ratio. 24 ...... 25 ..... 26. On examination of facts on record, we find that the aforesaid submissions of learned Depar....