TMI Blog2021 (11) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. In terms of the provisions of Sec.92-A of the Income Tax Act, 1961 (Act), the Assessee and its wholly owned holding company were Associated Enterprises ( AEs ). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an international transaction i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms Length Price (ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mindtree Limited (Segmental) 18.19% 16.09% 5. Persistent Systems Limited 28.27% 25.67% 6. R S Software (India) Limited 17.41% 17.07% 7. Tech Mahindra Limited (Seg) 18.72% 16.75% Arithmetic Mean 20.90% 18.61% 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: Computation of arm s length price by the TPO and the adjustment made: Arm's Length Mean Margin 20.90% Less: Working Capital Adjustment 2.29% Adjusted mean margin of the comparables 18.61% Operating Cost (`OC') ₹ 3,718,877,368/- Arm's Length Price (ALP') = 118.61% of OC ₹ 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s erroneous. Such a claim cannot be disregarded only on the basis that it is contrary to Assessee s own stand in the TP study. 9. Before we refer to the decision cited by the learned AR, we may look at the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)...... (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic 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 marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 10. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 11. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference: ITA Nos. IT(TP)A Nos.1418 2735/Bang/2017 Related Party Net Sales Related Party Transaction Transaction /Net Sales 25,739,000,000 60,019,000,000 42.88% (Source: AR 2012-13 o pg. 69, 70 71) Hence, the company fails the RPT filter applied by the TPO and hence should be rejected. 13. The DRP, however, has not considered this submission, but has confirmed the order of TPO. We are of the view that it would be just and proper to set aside the order of DRP on this issue and remand the issue to AO/TPO for consideration of the content' n of the assessee with regard to the exclusion of this company by application of RPT filter. 13. Respectfully following the aforesaid decision, we direct exclusion of the 3 comparable companies set out in Grd.No.9 (a) of the Assessee s appeal. 14. No other grounds were pressed for adjudication. We direct the TPO to compute the ALP of the international transaction in accordance with the directions given in this order after affording the Assessee opportunity of being heard. 15. In the result, appeal of the Assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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