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2016 (11) TMI 1402 - AT - Income TaxTransfer pricing adjustment - Held that:- Assessee is a captive service provider for its associated enterprises abroad, primarily USA-based entities. The assessee is a part of Ness Technology Inc. USA group, which is a leading global information technology services concern. The assessee company has four units in India, located at Bangalore, Hyderabad, Mumbai and Pune and is providing software development services to its group enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. International Transactions on recovery of expenses - Recovery of mark-up or profit element in the hands of assessee - Held that:- All the material clearly brings out a pertinent feature that in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises, which-in turn recovers it from the end clients, there is no involvement of any profit-element in the hands of the associated enterprises. Therefore, it would be wrong on the part of the income tax authorities to take a position and infer notionally about recovery of mark-up or profit element in the hands of assessee. It has also been brought out that it is a standard practice in the I.T. Industry to recover out of pocket expenses incurred during the course of providing services for the clients on a cost to cost basis. Under these circumstances, in our view, the Transfer Pricing Officer erred in proceeding to infer a non-existent understanding between assessee and its associated enterprises so as to impute income qua the instant transaction in terms of section 92(1) of the Act. Another pertinent fact which has not been rebutted by the Revenue before us is to the effect that in similar situation, from assessment year 2004-05 to 2010-11, no transfer pricing adjustment has been made by the Assessing Officer in relation to the International Transactions on recovery of expenses. Determination of arm’s length price for the service charges at 10% of the expenses recovered - Held that:- Section 92C prescribes the manner of determination of the arm’s length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm’s length price has to be made. It is quite clear that there is no adhocism permissible in the manner of computation of arm’s length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm’s length price @10% of the expenses recovered is not only adhoc but it also does not conform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm’s length price. Thus the action of the Transfer Pricing Officer/Assessing Officer in making an addition deserves to be set-aside.
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