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2015 (7) TMI 600 - ITAT DELHI

2015 (7) TMI 600 - ITAT DELHI - TMI - Transfer pricing adjustment - determination of the assessee’s profit margin from the international transaction of `Provision of marketing support services’ - Held that:- We find from the asessee’s Profit & Loss Account that the amount of Revenue received from AEs stands at ₹ 28,89,60,870/-. As against that, the assessee calculated its margin at 17.90% by considering operating revenue at ₹ 28,99,33,453/-. It is self evident that the gross revenue .....

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lowed the suit by erroneously taking such an inflated figure of the revenue. We, ergo, set aside the impugned order to this extent and direct the TPO to adopt the correct figure of operating revenue at ₹ 28,89,60,870/-.

Selection of comparable - inclusion of three comparables in the final set of comparables viz., Engineers India Ltd., RITES Ltd., and WAPCOS Ltd - Held that:- It has been brought to our notice that the matter of the preceding year is still pending before the TPO a .....

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he final set of comparables, the TPO will also go into the issue of working capital adjustment as has been directed by the Tribunal in its aforequoted order.

Transfer pricing adjustment is against not allowing any risk adjustment - Held that:- Adverting to the facts of the instant case, we find that there is no material worth the name justifying the claim of risk adjustment by comparatively showing particular risks undertaken or not undertaken by the assessee vis à-vis the comparables .....

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stical purposes. - ITA No.1384/Del/2012 - Dated:- 1-7-2015 - Shri R.S. Syal and Shri A.T. Varkey, JJ. For the Petitioner : Shri Rohit Tiwari, CA For the Respondent : Shri Subhakant Sahu, Addl. CIT & Shri Vijay Choudhary, JCIT ORDER PER R.S. SYAL, AM: This appeal by the assessee arises out of the final assessment order passed by the Assessing Officer (AO) u/s 143(3)/144C read with section 254 of the Income-tax Act, 1961 (hereinafter also called the Act ) on 30.1.2012 in relation to the assess .....

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ny Ltd., China. The assessee reported four international transactions in Form No.3CEB. The Assessing Officer (AO) referred the matter of determination of the arm s length price (ALP) of the international transactions reported by the assessee to the Transfer Pricing Officer (TPO). The entire controversy in the instant appeal is against the international transaction of Provision of Marketing support services with the transacted value of ₹ 28,89,60,870/-. The assessee applied Transactional Ne .....

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1,893 Add: 7% mark up Rs.19,071,560 Total Revenue Rs.289,933,453 (B) Operating profit (B-A) Rs.44,027,356 (C) Margin on cost (C/A) 17.90% 4. The TPO did neither dispute the application of TNMM as the most appropriate method nor reject the PLI of OP/TC. However, in his opinion, the calculation done by the assessee was made by artificially inflating its operating profit. He opined that the non-operating expenses could not be considered for calculation of mark-up and, hence, the mark-up should be c .....

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rder :- Table III. S.No. Name OP/TC (%) 1. Engineers India Ltd. 20.96 2. RITES Ltd. 40.82 3. CRISIL (Information & Advisory Services Segment) 14.23 4. WAPCOS Ltd. 25.23 Arithmetic Mean 25.31 6. He worked out the amount of transfer pricing adjustment at page 27 of his order in the following manner :- Table IV. Total cost of the assessee : Rs.245,906,097/- ALP at a margin of 25.31% : Rs.308,144,930/- Revenue Shown (as per Table III) : Rs.263,119,523/- Difference : Rs.45,025,407/- 7. The assese .....

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e heard both the sides and perused the relevant material on record. Before proceeding further, we want to make it clear that there is no dispute on the application of the TNMM as the most appropriate method and the adoption of the PLI as Operating profit to Total Costs on the international transaction of Provision of marketing support services . There is a three-fold attack to the computation of the ALP. First is the determination of the assessee s profit margin by the TPO; second is the selecti .....

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6,31,19,523/-. The assessee s contention is that this amount has been erroneously taken by the TPO. 10. It can be seen that the assessee was compensated by its AE for rendering marketing support services at direct and indirect costs incurred with a mark-up of 7% on such total costs. The total amount received by the assessee is to the tune of ₹ 28,89,60,870/-. This figure of revenue was computed by applying mark-up of 7% on both operating and non-operating costs incurred by the assessee in .....

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ting expenses and thereafter added 7% mark-up for working out the amount of Operating Revenue at ₹ 26,31,19,523/-, which amount forms the bedrock for the transfer pricing adjustment of ₹ 4,50,25,407/- (Rs.30,81,44,930/- minus ₹ 26,31,19,523/-). It is observed that as against the assessee s mark-up of 7% earned from its AEs on total costs incurred, its OP/TC came at 17.90%. The TPO computed average of OP/TC of comparable comparables at 25.31%. Now the question arises as to wheth .....

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y income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C deals with the computation of arm's length price. Sub-section (1) stipulates that the arm's length price in relation to an international transaction shall be determined by any of the given methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such pers .....

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at the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. Under sub-clause (iii), the net profit margin as per sub-clause (ii) is adjusted to take into account the differences between the international transaction and the comparables. Sub-clauses (iv) and (v) state that the net operating profit margin realized by the assessee as per sub-clause (i) is est .....

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has actually been undertaken does not exceed such percentage of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. Per contra, if the variation between the ALP so determined and price at which the international transaction has actually been undertaken exceeds the stipulated cushion, then the difference calls for addition to .....

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section 92C(2)]. 12. Coming to the first proposition, it is clear that as per rule 10B(1)(e), the net operating profit margin of the assessee and that of comparables is required to be calculated w.r.t. the same base. In the instant case, the assessee as well as the TPO have adopted the base of Operating Costs . With this base, the rate of the assessee s profit margin comes to 17.90% (Table I) and the arithmetic mean of comparables at 25.31% (Table III). A comparison is required to be made of the .....

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adjustment can be made by viewing the ALP of the international transaction and then it is compared with the actual transacted value. The difference, if breaches the safe harbor, represents the amount which the assessee ought to have received from its AE but not realized. It is such shortfall, which calls for addition. 13. When we advert to the facts of the instant case, it is noticed that the price of the international transaction is ₹ 28,89,60,870/-, but the TPO has substituted such pric .....

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e 10B(1)(e). As such, we hold that the authorities below were not justified in working out the transfer pricing adjustment by considering the amount of revenue at ₹ 263,119,523, which ought to have been taken at ₹ 28,89,60,870/-. 14. We find from the asessee s Profit & Loss Account that the amount of Revenue received from AEs stands at ₹ 28,89,60,870/-. As against that, the assessee calculated its margin at 17.90% by considering operating revenue at ₹ 28,99,33,453/-. .....

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port. It is observed that the TPO also followed the suit by erroneously taking such an inflated figure of the revenue. We, ergo, set aside the impugned order to this extent and direct the TPO to adopt the correct figure of operating revenue at ₹ 28,89,60,870/-. 15. The second aspect of the transfer pricing adjustment which has been assailed by the assessee in the instant appeal is the inclusion of three comparables in the final set of comparables viz., Engineers India Ltd., RITES Ltd., and .....

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-1, which are in the nature of providing marketing assistance, advice and other information to its AE. More specifically, these include Market development; Liaising with the customers for obtaining feedback on behalf of the company; Exploring new service lines/ventures for the company in India; Providing information on potential customers; and Conducting study on the viability of sourcing parts and components from India and its neighbouring countries. It can be noticed from the order of the TPO .....

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year and the assessee challenged the same before the tribunal. The tribunal has since disposed of the assessee s appeal for the immediately preceding year and a copy of such order dated 4.4.2014 (in ITA No.3236/Del/2011) is available on record. Vide this order, the tribunal has restored the matter to the file of the AO for examining the comparability or otherwise of these companies along with the question of allowability or otherwise of working capital adjustment. It has been brought to our not .....

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dering the question of inclusion or exclusion of these three companies in the final set of comparables, the TPO will also go into the issue of working capital adjustment as has been directed by the Tribunal in its aforequoted order. 17. The last aspect of the transfer pricing adjustment is against not allowing any risk adjustment. During the course of proceedings before the TPO, the assessee claimed risk adjustment by contending that it is a captive service provider. The TPO examined risk matrix .....

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