TMI Blog2011 (2) TMI 1294X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the assessee that their ratio also falls between 30 to 60 percent, we, therefore, hold that if the wage/sale ratio of the parties, 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. We consider it just and proper to restore this issue to the file of the DRP to verify the claim of the assessee. Selection of Companies as comparables - M/s. Space Computer and Systems Ltd. - As per assessee, TPO has wrongly been excluded simply on the ground that it was the first year of operation of the comparable. DRP will verify such fact and after verifying a specific finding should be recorded in this regard and appropriate relief should be given to the assessee Infosys Technologies Ltd., Kals Information System Ltd., Visualsoft Tech Ltd. and Wipro Ltd., particularly, Infosys Technologies Ltd. and Wipro Ltd., - 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. Cotton Textiles Export Promotion Council and Export Promotion Council ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) and the methodical benchmarking process carried out by the assessee in the transfer pricing (TP) documentation maintained by it in terms of section 92D of the Act read with rule 10D of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le-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 terms of section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 (Rules) : 3.2 Resorting to arbitrary and mechanical rejection of companies and in doing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 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 the learned Dispute Resolution Panel has upheld such action of the Transfer Pricing Officer. The assessee had submitted 50 comparables while arrivin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.70% 5. TSR Darashaw Ltd. 16.29% 6. MCS Ltd. 9.56% 7. Empire Industries Ltd. 15.78% Average 0.26% Out of the above seven parties, the learned Transfer Pricing Officer has rejected the three comparables mentioned at Sl. Nos. 1, 2 and 3 and has worked out as mean margin at Rs. 13.58 per cent. in the following manner : S. No. Company s name Margins for the year ending March, 2006 1. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the above list : Basis Infosys Wipro Avaya Risk profile Full fledged risk taking entrepreneurs Full fledged risk taking entrepreneurs Minimal risk. 100% services to AEs. Nature of services Includes consulting, application design, development, re-engineering and maintenance, systems integration, package evaluation and implementation, and business process management. Infrastructure servi-ces, BPO services, testing services, con-sulting, application, development and maintenance services. Contract software development services. Turnover Rs. 9,028 crores Rs. 10,264 crores Rs. 42 crores Ownership of proprietary products Develops proprietary pro-ducts like finacle, Infosys Actice Desk, owns intangible assets worth INR 69,500 crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 per cent. SQL Star International Ltd. 16.17 per cent. Sasken Communciation Technologies Ltd. 13.32 per cent. Satyam Computer Services Ltd. 41.25 per cent. Kals Information Systems Ltd. 37.78 per cent. Infosys Technologies Ltd. 38.74 per cent. Visualsoft Technologies Ltd. (Merged) 13.05 per cent. Wipro Ltd. 34.38 per cent. Mean 20.94 per cent. He submitted that if the above adjustments are granted to the assessee, then, the assessee's case will be covered by the adjustment of +/- 5%. He referred to the proviso to section 92C(2) and contended that it will not be a case where any addition could be sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sst. 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 at an arm's length price and he has correctly applied the aforementioned three filters according to which the mean margin has been computed at 30.98 per cent. in respect of comparable four parties. He submitted that the other parties have rightly been rejected and reasons have been recorded in the order of the Transfer Pricing Officer. He submitted that if there is any factual error in computing the wage/sales ratio computed by the Transfer Pricing Officer, the same can be got verified from the Transfer Pricing Officer. It was further submitted that in respect of marketing support service, the mean margin has rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 within +/- 5%. ratio. In our opinion, such contention of the assessee goes to the root of the matter and, hence, has to be considered after verification of the claim of the assessee. For verification, we consider it just and proper to restore this issue to the file of the Dispute Resolution Panel with a direction to verify the claim of the assessee and if it is found that those four parties have a wage/sale ratio between the range of 30 to 60 per cent., then, the same should also be included in the list of the comparables and mean margin should be worked out. We direct accordingly. It has also been the contention of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 material on record to controvert such findings of fact recorded by the learned Transfer Pricing Officer. Hence, the exclusion of such party from the list of comparable is also upheld. So as it relates to IL FS Academy for Insurance Finance, it has been observed by the Transfer Pricing Officer that the said company is deriving income from training and online examination fees and major expenses are incurred on training and online examination cost and, therefore, this company is engaged in providing training in the form of insurance and finance. Therefore, the result of such company are also not comparable with th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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