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2015 (12) TMI 1410 - ITAT DELHI

2015 (12) TMI 1410 - ITAT DELHI - TMI - Transfer pricing adjustment - whether the PSM is the appropriate method as adopted by the assessee or TNMM method as adopted by the AO? - Held that:- In the present case, we have to see as to whether the PSM is the appropriate method as adopted by the assessee or TNMM method as adopted by the AO. In the present case, the different activities performed by the Infogain India i.e. assessee and Infogain US are inextricably linked and both the entities are cont .....

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with each project execution. However, the TPO had not considered the role of the GDO. In the present case, the TPO mentioned that the shifts in the assessee’s case started from 2005 onwards, however, the assessee chose to change the method in the financial year under consideration, the explanation of the assessee was that though the transition process started from September 2005 which was very gradual and led to the complete shift in the functional matrix of Infogain Group over a period of 2-3 .....

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their relative importance in the value chain, which is evident from page nos. 229 to 234 of the assessee’s paper book wherein the functions are clearly designed in a tabular form. In the present case, both the parties i.e. Infogain India (assessee) and Infogain US are making contribution. Therefore, the Profit Split Method is the most appropriate method for determination of ALP.

Therefore, we are of the view that the conclusion of the TPO that the PSM is adopted by the assessee only .....

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How the allocation is to be done for residuary profits? - Held that:- It is well settled that as per the Rule 10D, the benchmarking should be done with the external uncontrolled transactions, however, in the present case, it is not possible to get a comparable. Therefore, such allocation can be done on the basis that how much each independent enterprise might have contributed. Therefore, relative contribution has to be determined, based on key value drivers because benchmarking is not pra .....

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tributions by each entity. In the present case, since the department has accepted in the preceding year and the succeeding year 40:60 ratio between the Infogain India and Infogain US and if the facts are similar for the year under consideration then no deviation is to be done. We, therefore, set aside the issue to file of the AO/TPO to decide the issue following the clear directions given in former part of this order as well as by the Coordinate Bench in the aforesaid referred to orders and afte .....

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,259,630/- undertaken by the Deputy Commissioner of Income Tax, Circle 11(1), New Delhi ( the Ld. AO ) vide Assessment Order dated October 01, 2012 (received by the Appellant on October 12, 2012) passed under section 143 (3) read with section 154 of the Income Tax Act, 1961 (received by the Appellant on November 01, 2012) is not in accordance with the law and therefore not sustainable. Transfer Pricing ( TP ) Adjustment: ₹ 145,259,630 That the Hon ble Dispute Resolution Panel, New Delhi ( .....

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ction 92CA(3) of the Act dated October 27, 2011 ( TP Order ). On the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in proposing and the Hon ble DRP has further erred in confirming the transfer pricing adjustment of ₹ 145,259,630/- without due application of mind and without affording a reasonable opportunity of being heard in the matter to the Appellant on the following grounds: 1.1. The DRP has erred on the facts and circumstances of the case and in law .....

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circumstances of the case and in law in rejecting/disregarding the profit split percentage embedded in the Transfer Pricing Documentation. 1.3. The DRP has erred on the facts and circumstances of the case and in law by alleging that the whole arrangement is too subjective and is not weighted on any empirical data as to how the split was arrived at. 1.4. The DRP has erred on the facts and circumstances of the case and in law by alleging that assessee has not made attempt by evaluating the contrib .....

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ed by the Ld. TPO: 1.6. The Ld. TPO erred in the facts and circumstances of the case and in law by substituting the comparability analysis conducted by the Assessee for its software development services function with a fresh comparability analysis based on his own conjectures and surmises. Specifically, the Ld. TPO erred by using an approach that had an inherent upward bias and employed erroneous filters, that were designed to select only high margin comparable companies. Accordingly, the fresh .....

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e Ld. TPO erred in the facts and circumstances of the case and in law by using data called pursuant to issuance of notice under Section 133(6) of the Act which was not available to the Assessee at the time of maintenance of Transfer Pricing Documentation. Further, the Ld. TPO also erred by not providing the complete information which was called pursuant to issuance of notice under Section 133(6) of the Act and by conducting the assessment based on unfair analysis. 1.9. The Ld. TPO erred by misco .....

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mic basis and without establishing any statistical veracity of the presumption/ hypothesis framed. Further, the Ld. TPO has also erred by juxtaposed application of two or more methods to conclude a single benchmarking analysis as application of wages-to-sales screen tantamount to adoption of the costplus method. 1.11. By using an incorrect computation of Net Cost Plus ( NCP ) margin of selected comparable companies and accordingly erred in computing the amount of adjustment on account of transfe .....

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he cam parables for financial year 2007-08 only for determination of the arm s length price, disregarding the multiple year data approach. 2.3. The Ld. TPO has erred on the facts and circumstances of the case and in law by not allowing the benefit of (+/-)5% as provided in the proviso to Section 92C(2) of the Act, while determining the arm s length price of the international transactions of the Assessee. 2.4. The Ld. TPO has erred on the facts and circumstances of the case and in law by not allo .....

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cannot be justified by any material on record. 3. From the above grounds it would be clear that only grievance of the assessee in this appeal relates to the addition amounting to ₹ 14,52,89,630/- made by the AO on account of transfer pricing adjustment. 4. Facts of the case in brief are that the assessee was engaged in the business of software development and filed the return of income on 30.03.2010 declaring income of ₹ 1,41,28,871/- which was processed u/s 143(1) of the IT Act, 19 .....

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ddition of ₹ 16,86,58,151/-. The AO then proposed the draft assessment order u/s 144C(5) of the Act which was forwarded to the assessee who filed objections in Form no. 35A to the Dispute Resolution Penal (DRP) on 27.01.2012 and highlighted the following events which contributed to shift in its functional matrix: (i) Formation of Global Delivery Organization in India in September, 2005. (ii) Relocation of key Personnel to India in July 2006. (iii) Establishment of Chief Technology Officer .....

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nd capacity risk is stated to be significantly resting with Infogain India. The TP study undertaken has, on the basis of fuctions/responsibilities and based on interviews with the key management personnel of the Infogain US and Infogain India, identified the functions in the value chain of software services provided by Infogain US and Infogain India to customers based in US and assigned weightages to the functions. It was further stated that based on such weightage a weight split of 40:60 has be .....

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as under: As per the form 3CEB, it is mentioned that Infogain India has provided Software Development Services (including human resource services) to its AEs namely Infogain Corp US and Infogain Limited UK. However, the transaction with Infogain UK is miniscule and only ₹ 6.7 lacs. The transaction with Infogain US is ₹ 54.07 crores. By a mere reading of the form 3CEB it automatically transpires that the assessee has provided software development services to its overseas AE. The TP re .....

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it to Infogain US who in turn provided it to the end customer. Post Migration, flow chart shows that there is no shift as far as the contract with end customer and AE and further sub contract to Infogain India is concerned, there is no marked shift. However, the delivery models have been different. Infogain US develops onshore in addition to sales and marketing services and Infogain India after the development process is over delivers directly to clients. The flow charts are only representative .....

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sis carried out in the TP report, Conceptualization and scoping, System Requirement and design, Coding, Documentation and Testing is done majorly in India. We however have no project wise data to prove this. No specific contracts to support this. Also going by the TP Report it is evident that this Inference is drawn on the basis of interviews and discussions with key management people. Again we do not have any details of these interviews undertaken. Going by the theory of the assessee in this ye .....

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sed and examined by us, this whole arrangement is too subjective and is not weighted on any empirical data as to how the split was arrived at. Moreover, since the majority of the conceptualization and designing functions are being performed in India, the unique intangibles, if any are in India itself and if they are getting transferred, the larger chunk of the split that is actually deriving the revenues should have been in India. In view of the same, we are not convinced that the split even if .....

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be evaluated by unrelated enterprises performing comparable functions in similar circumstances. We have nowhere in the submissions, or during the course of discussion seen that the assessee has made any attempt by evaluating the contribution made by Infogain India and Infogain US on the basis of FAR of each one of them and have reliably employed any external market data which may be indicative of how such contribution would be evaluated by unrelated enterprises performing comparable functions i .....

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case of Profit Split Method, the way that has to be done is also mentioned. We do not find that the assessee has demonstrated this comparability anywhere. The TP Report is subjective and completely inadequate to support its conclusions. We are constrained to reject the same for the reasons given above and agree with the action of the TPO. We are of the opinion that Profit Split Method is not the most appropriate method in this case for this year as the same was not demonstrated by the assessee a .....

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not be considered illegal and abuse of power by TPO. It has further been observed that: If the use of justifiable powers u/s 133(6) can lead to better results, there is no harm. The assessee has been confronted with the results of this exercise so there is no secrecy. Hence, the tenets of natural justice have also been followed and no further opportunity, in view of DRP, is needed to be provided to the assessee. 9. The DRP also did not accept the assessee s claim of risk adjustments by referring .....

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s and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Mechanical adjustment cannot be made to the margins of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. In the view of DRP assessee cannot be compared to a risk free security. 10. The DRP, however di .....

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r and should be accordingly considered for comparables. Provision for doubtful debts is not a normal operating expenses/income hence has been rightly excluded. Issues of forex is to be examined by TPO if it is not materially affecting assessee should not be taken for comparables either. 11. As regards to the objection of the assessee for considering the multiple year data instead of single year data while working out the Arm s Length Price, the DRP observed as under: This issue has been examined .....

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ion took place. The proviso can be invoked only if it is established that earlier years circumstances do have a bearing in the performance of the year under audit. The Delhi High Court in Schefenacker Motherson Ltd. Vs ITO 2009-TIOL-376-ITAT Delhi has upheld the use of current year data. ITAT Hyderabad in M/s Deloitte Consulting India Pvt. Ltd. ITA No. 1082 and 1084 of 2010 in order dated 22.07.2011 has again reaffirmed the use of single year data. Jaipur ITAT in case of Sakata Insx. Order in 20 .....

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made before the authorities below and further submitted that Infogain India (the assessee) was established in 1997, as a back-end software services company, which performed services mainly for its parent Infogain Corporation, USA ( Infogain US ). However, in the relevant assessment year there was a significant change in the functional matrix of the Infogain Group, with Infogain India assuming critical delivery functions and the corresponding. There was a process shift with the formation of Globa .....

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wards India. Therefore, the organizational structure was aligned by client services and delivery function and currently the team at Infogain US has been reduced to one-fourth since the conversion year. It was further stated that Infogain India assists Infogain US, to a limited extent, in client identification and marketing functions and in respect of international regions (regions other than US and UK), Infogain India is engaged in performing client identifications, marketing and client relation .....

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re services company of its AE to being fully responsible for the execution and delivery of software services to the end customers. It was submitted that under the offshore service delivery model, the entire project is developed and managed offsite (i.e. in India) by Infogain India while an employee of the AE acts as the onsite coordinators for managing client expectations and acting as an interface/communication channel between the client/customer and Infogain India. It was explained that under .....

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technical support. The said work is undertaken through coordinated efforts of various teams including Global Resource Management, Global Process Management, Delivery Practices, Strategic Delivery Practice and Local Delivery Management. It was further stated that during the initial years of the formation of the Infogain Group, the execution and delivery of the software services as well as the marketing of these services was handled from Infogain US. However, gradually the fulcrum of the entire bu .....

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rformed by Infogain India, with Infogain US performing these functions only in respect of the onsite software services. Further, Infogain India and Infogain US are responsible to monitor operations and quality of project works in accordance with the standards and agreed specifications. The delivery functions performed by Infogain US are continuously monitored by the PDs based in Infogain India. Sales and Marketing Functions Infogain US plays a vital role in marketing and selling Infogain Group s .....

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gain US. In October 2007, for expansion into non-United States regions, another SBU i.e. International was created in India and a General Manager was appointed. This was done in order to reduce Infogain Group s dependence on United States which was experiencing a slow done. This led to a marketing department being instituted in India. The marketing department was responsible to perform marketing and selling activities to target customers/clients in regions where Infogain US/Infogain UK are not o .....

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e advertising through newsletters, information collection on potential clients and through e-mails and tele-marketing; and • Infogain India also conducts and participates in seminars, exhibitions and conferences by various IT associations, etc. to increase its visibility and market presence. However, the aforesaid marketing functions performed by Infogain India are ancillary to the marketing functions performed by Infogain US. Additionally, Infogain India also provides support in marketing .....

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pe: • Human Resource Management Function The management of both Infogain India and Infogain US are responsible for coordinating their human resource functions including hiring personnel, determining compensation and benefits and formulating human resource policies wherein it even decides the increments and promotions based on revenue targets, business growth and delivery excellence in accordance with the Infogain Group s policy. • Corporate strategy determination All long term strategi .....

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establishment of Chief Technology Officer (CTO) in Infogain India, Infogain India became responsible for performing the following information technology functions: - Preparation of technology roadmap - it has to assess future technology trends and provide directions to realize the best return on investments, create the technology strategy roadmaps, evaluate and promote tools, technology for internal usage; - Launching of the knowledge management portal and head the steering committee; - Assist .....

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iew technical design in bids/proposals, etc. The following table depicts the split in the functional responsibilities of Infogain and its AEs: Table 5: Functional Responsibilities of Infogain and its AEs Functions Performed Entity Identifying Clients /Maintaining client relationship/Client contracts Function • Identification of clients •Contract formulation, negotiation, commitment Infogain US/Infogain India (to limited extent) • Lead Generation, Soliciting orders and initiating s .....

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esponsible for onsite project management, the onsite engineers work under the direction of the PDs in India) • Conceptualization, Requirement analys is and Scoping Infogain India/Infogain US (However, the deliver y team at Infogain US wor k under the direction of the PDs located at Infogain India.) • System requir ement/architecture requirement design Infogain India/AEs Coding, Testing and Documentation Function • Undertakes code generation Infogain India/Infogain US • Testin .....

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ing decision, the ld. Counsel for the assessee submitted that in the pre-restructuring phase, Infogain US was solely responsible for determining the key terms and conditions of the contract with the customers, including pricing. However, with the introduction of an online costing tool in August 2006, Infogain India also began to provide important inputs in the entire pricing decision based on project costing estimates, resource requirements, time commitments etc. as the entire delivery responsib .....

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India was held in relation to price decision but the same was changed in the assessment year under consideration, in view of shift in functional matrix. 16. The ld. Counsel for the assessee explained that the Profit Split Method (PSM) is normally used in multiple international transactions, which are so closely interrelated that they cannot be evaluated separately for determining the Arm s length price or in situations involving transfer of unique intangibles. The ld. Counsel for the assessee fu .....

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llaborative functions performed by Infogain India and Infogain US. Therefore, the Profit Split Method (PSM) has been selected as most appropriate method for the determination of Arm s length price in respect of International transactions between Infogain India and Infogain US. It was further stated that none of the direct methods (CUP, RPM and CPLM) can be applied to establish Arm s length value of the assessee s international transactions due to paucity of comparables. It was stated that the Ru .....

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with critical functions and risks for providing software services to the end-customers. Therefore, the TNMM method was not considered as most appropriate method for determining the Arm s length basis. It was further stated that based on interviews with the key management personnel of Infogain India and Infogain US, the functions in the value chain of software services provided by Infogain US, customers based in the US and weights were assigned to the functions having regard to their relative im .....

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the assessee referred to page no. 229 of the assessee s paper book which is the copy of FAR analysis done by the assessee, a reference was also made to page no. 213 of the assessee s paper book and it was stated that functions were clearly designed which clearly shows that Infogain India and Infogain US, both were making the contribution. Therefore, TNMM was not the correct method and the PSM method adopted by the assessee is most appropriate method. It was pointed out that in the assessment yea .....

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wed in the case of M/s Orange Business Services India Networks Pvt. Ltd. Vs DCIT in ITA No. 1201/Del/2015 for the assessment year 2010-11 order dated 08.05.2015. The ld. Counsel for the assessee stated that the assessee s case falls in category 1 mentioned in Circular No. 6/2013 dated 29.06.2013 issued by the Income Tax Department. Therefore, the TNMM method adopted by the TPO/AO was not the correct method and the PSM adopted by the assessee was the most appropriate method. The reliance was plac .....

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re not conclusive for the assessment year under consideration i.e. assessment year 2008-09. It was further submitted that in the assessee s case there was no international transaction, therefore, the PSM was not the most appropriate method. It was stated that for applying the PSM, risks is to be quantified in scientific manner on creditable objectives information which had not been done in the present case. It was further stated that in assessee s case no external data was available for uncontro .....

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t Circular No. 6 issued by the CBDT has no relevancy for the functional profile of developer in R&D sector. Therefore, the PSM was not applicable in assessee s case and the TPO/AO rightly applied the TNMM method as most appropriate method. The reliance was placed on the following case laws: Haworth (India) (P) Ltd. Vs DCIT(OSD) (2011) 131 ITD 215 (Del) Sony India (P) Ltd. Vs DCIT (2008) 114 ITD 448 (Del) 18. It was further submitted that while applying the PSM the assessee has not given any .....

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r the TPO nor the DRP raised any objection. It was further stated that in the succeeding assessment year 2009-10, no such adjustment has been made by the department, even when the facts in the said year were similar as were involved in the year under consideration. It was submitted that even on the principle of consistency, the department ought to have accepted the PSM method adopted by the assessee. Reliance was placed on the following case laws: CIT Vs Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 .....

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ng out the Arm s length value in respect of international transactions between Infogain India i.e. assessee and Infogain US i.e. parent company. Rule 10B(1)(d) of the Income Tax Rules, 1962, defines the Profit Split Method as follows: Profit Split Method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter related that they cannot be evaluated separately for the purpose of determining t .....

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ch indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) The combined net profit is then split amongst the enterprises in proportion of their relative contributions, as evaluated under sub clause (ii); (iv) The profit thus apportioned to the assessee is taken into account to arrive at an arm s length price in relation to the international transaction; Provided that the combined net profit referred to in subclau .....

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(iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction; 21. From the provisions contained in the above said Rule 10B(1)(d), it is clear that PSM may be applicable in case where transaction involved transfer of unique, intangibles or any .....

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reement, transaction or a residual profit intended to represent the profit that cannot readily be assigned to one of the parties. The contribution of each enterprise is based upon a functional analysis and valued to the extent possible by any available reliable standard market data. The functional analysis is an analysis of the functions performed (taking into account assets used and risk assumed) by each enterprise. 22. Before us there are two methods for consideration i.e. PSM and TNMM. A peru .....

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er taking note of the decision of the Special Bench in the case of Aztech Software and Technology Ltd. Vs ACIT (supra), OECD in transfer pricing guidelines for multinational enterprise and tax administration, the United Nations-Practical manual on Transfer Pricing for developing countries and then after deliberating on the methodology and precedence available thereon arrived at a conclusion in para 17.3 to 18.2 of the order dated 15.04.2014 as under: 17.3. Before us there are two methods for con .....

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mbines net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in the similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub clause(ii); (iv) th .....

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trolled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the divisions of profits that would have been anticipated and reflected in an agreement transactions or a residual profit intended to represent the profit that cannot readily be assigned to one of the parties, such as the profit arising from high value, sometimes unique, intangibles. 183. The contribution of each en .....

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x administration in Chapter 2 on transfer pricing methods, at page 93, para C.1 states as follows: C.1 In general 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realize from engaging in the trans .....

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that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm s length. See paragraphs 2.132-2.145 for a discussion of how to split the combined profits. 17.5. On residual analysis, it is stated as follows: C.3.2.2 Residual analysis 2.121 A residual analysis divides the combined profits from the controlled transactions under examination in two stages. In the first stage, each participant is allocated an arm s length remuneration for its nonu .....

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profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances, following the guidance as described at paragraphs 2.132- 2.145 for splitting the combined profits. 2.122 An alternative approach to how to apply a residual analysis could seek to replicate the outcome of bargaining between independent enterprises in the free market. In this context, in the first stage, the initial remuneration provided to each parti .....

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ependent enterprises might have split the difference between the seller s minimum price and the buyer s maximum price. 2.123 In some cases an analysis could be performed, perhaps as part of a residual profit split or as a method of splitting profits in its own right, by taking into account the discounted cash flow to the parties to the controlled transactions over the anticipated life of the business. One of the situation in which this may be an effective method could be where a start-up is invo .....

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business, and estimates of the relative timing of receipts can be problematic. Such an approach, therefore, would require considerable caution and should be supplemented where possible by information derived from other methods. 17.6. The United Nations - Practical Manual on Transfer Pricing for Developing Countries - Chapter VI - Transfer Pricing Methods, states as follows: 6.3.13.1. The Profit Split Method is typically applied when both sides of the controlled transaction contributes significa .....

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Profit Split Method starts by identifying the profits to be divided between the associated enterprises from the controlled transactions. Subsequently, these profits are divided between the associated enterprises based on the relative value of each enterprise s contribution, which should reflect the functions performed, risks incurred and assets used by each enterprise in the controlled transactions. External market date (e.g. profit split percentages among independent enterprises performing com .....

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ted as follows: 6.314.7 The Residual Profit Split Method is used more in practice than the contribution approach for two reasons. Firstly, the residual approach breaks up a complicated transfer pricing problem into two manageable steps. The first step determines a basic return for routine functions based on comparables. The second step analysis returns to often unique intangible assets based not on comparables but on relative value which is, in many cases, a practical solution. Secondly, potenti .....

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ch is the combined profits of company A and company B after deducting the basis (arm s length ) return for the manufacturing function, is then divided between Company A and Company B. This allocation is based on relative R & D expense which are assumed to be a reliable key to measure the relative value of each company s intangible property. Subsequently, the net profits of Company A and Company B are calculated in order to work back to a transfer price. 17.8. In Practical Guide to U.S. Trans .....

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utes extra- normal profit or loss in proportion to the relative investment cost (or other valuation) of the non-routine intangible assets to which such extraordinary profits pertains. This approach is consistent with the IRS statutory objective u/s 482 of requiring consideration for intangible property transferred in a controlled transaction to be commensurate with the income attributable to the intangible. It is also consistent with the result that would obtain at arm s length under a hypotheti .....

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maining residual operating profit or loss is allocated based on residual, entrepreneurial capital so as to equalize the rate of return on such capital, adjusted for market differences in the cost of capital. In actual practice, implementation of the RPSM concept outlined above involves the determination of a number of interrelated valuations of functional and entrepreneurial activities in different countries and economic circumstances. The existing IRS regulations provide relatively little speci .....

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TNMM is stated as follows: Transactional Net Margin Method (TNMM) : Rule 10(B)(1)(e) describes TNMM as under: (i) The net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) The net profit margin realized by the enterprise or by an unrelated enterprise from a comparab .....

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he net profit margin realized by the enterprise and referred to in sub clause (i) is established to be the same as the net profit margin referred to in sub clause (iii); (v) The net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net .....

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s earned from comparable uncontrolled situation. The only difference is that, in the RPM and CPM methods, comparison is of margins of gross profits and whereas in TNMM the comparison is on margins of net profit. TNMM requires comparison between net margins derived from the operations of the uncontrolled parties and net margins derived by an AE from similar operations. Net margin is indicated by the rate of return on sales or cost or operating assets, and this forms the basis for TNMM. A function .....

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meters generally available in the case of party providing service. 18.1. The, in its review of comparability and methods, dt. 22nd July,2010 in Part III B Transactional Net Margin Method, B I, page 33, paras 2.58 to 2.59, held as under: B. Transactional net margin method B.1. In general 2.58 The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are approp .....

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sactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) should ideally be established by reference to the net profit indicator that the same tax payer earns in comparable uncontrolled transactions, i.e. by reference to internal comparables (see paragraphs 3.27- 3.35). A functional analysis of the controlled and uncontrolled transactions is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results .....

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licable in cases where one of the parties makes all the unique contributions involved in the controlled transaction, while the other party does not make any unique contribution. In such a case, the tested party should be the less complex one. See paragraphs 3.18-3.19 for a discussion of the notion of tested party. 18.2. In the working draft of a chapter of the practical Manual in Transfer Pricing for Developing Countries, in Chapter 5 Transfer Net Margin Method is discussed at para2.1. Transacti .....

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ransactions that are appropriate to be aggregated). The profit margin indicators are discussed in paragraph 2.3 below. The TNMM compares the net profit margin (relative to an appropriate base) that the tested party earns in the controlled transactions to the same net profit margins earned by the tested party in comparable uncontrolled transactions or alternatively, by independent comparable companies. As such, the TNMM is a more indirect method than the cost plus/resale price method that compare .....

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rty in the analysis can either be the related party manufacturer or the related party distributor. The choice of the tested party depends on the availability of comparable data. This usually implies that the TNMM is applied to the least complex of the related parties involved in the controlled transaction, because generally more comparable data will then be in existence and fewer adjustments will be required to account for differences in functions and risks between the controlled and uncontrolle .....

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see as to whether the PSM is the appropriate method as adopted by the assessee or TNMM method as adopted by the AO. In the present case, the different activities performed by the Infogain India i.e. assessee and Infogain US are inextricably linked and both the entities are contributing significantly to the value chain of provision of software services to the end customers. In the instant case Global Delivery Organization Group (GDO) in India is responsible for delivery of services to the custome .....

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change the method in the financial year under consideration, the explanation of the assessee was that though the transition process started from September 2005 which was very gradual and led to the complete shift in the functional matrix of Infogain Group over a period of 2-3 years, therefore, the pricing model was changed w.e.f April 2007, the said explanation appears to be a plausible. In the instant case, the assessee assigned weights to each activity keeping in view the relative importance .....

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. Infogain India (assessee) and Infogain US are making contribution. Therefore, the Profit Split Method is the most appropriate method for determination of ALP. In the instant case, it is noticed that the TPO in the show cause notice has pointed out that the assessee changed the method due to loss incurred, in our opinion, the conclusion drawn by the TPO was not justified because the decision as what is the most appropriate method does not depend on the fact as to whether an assessee is having l .....

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es, 1962. According to the said provisions the Profit Split Method is applicable mainly in international transactions which are so interrelated that they cannot be evaluated separately, for the purpose of determining the arms length price. The combined net profit is then split amongst the enterprises in proportion to relative contribution as evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable exter .....

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ibuting significantly to the value chain of provision of software services to the end customers. 24. Therefore, by keeping in view the aforesaid discussion and considering the totality of the facts we are of the view that Profit Split Method was rightly applied by the assessee for determining the arm s length price. Moreover, in the instant case, it is an admitted fact that in the preceding years as well as in the succeeding year i.e. assessment year 2011-12, the same method i.e. Profit Split Me .....

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P. Ltd. in ITA No. 4670/Del/2009 order dated 31.12.2013 25. In the former part of this order, we have held that in the assessee s case to determine the Arm s Length Price, the most appropriate method is the Profit Split Method, now question arises that how the allocation is to be done for residuary profits. It is well settled that as per the Rule 10D, the benchmarking should be done with the external uncontrolled transactions, however, in the present case, it is not possible to get a comparable. .....

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