Sunday 22 March 2015

S. 92C:Transfer pricing - Arms’ length price –Comparables and adjustments.[S.92CA]


 

The assessee was engaged in the export of network security and administrative software solutions  which were developed exclusively for its parent company (BDC).For purpose of determining the  Arm's Length Price, the assessee selected 11 comparables and determined the Average Arithmetic  Mean at 10.30%.Since the mean operating profit/Total cost of comparable companies was less than  the OP/TC of 12.90% of the assessee, it was claimed that its international transaction relating to software development services was at Arm's Length Price.

The TPO did not accept the comparables given by the assessee and selected 14 new companies.  Accordingly, the TPO determined the mean of margins earned by the final set of comparables at  26.07% as against the margins of 12.40% and computed ALP. Thus, he made T.P. adjustment to the  total income of the assessee.  DRP directed the TPO to consider 11 companies as comparables which included 4 companies  originally selected by the assessee. On appeal Tribunal held that ; Assessee company having turnover  of Rs. 24.48 crores from software development services, could not be compared with company whose turnover exceeded Rs. 50 crores and research and development expenses also crossed R&D/sales  threshold of 3 per cent. Where relevant data of entire year of a company is not available, it cannot be  selected as comparable. Where a company which had incurred super losses due to extraordinary  events like winding up of relationship with clients, filing of bankruptcy by some clients, etc., it is to  be excluded from comparables list; simultaneously company earning super profit should also have to be excluded from list of comparables. Where a company had discontinued its product division and

was into IT services, it cannot be said to be functionally dissimilar to company engaged in software  services. When a company was selected as comparable in earlier year, there being no change in its  usiness activities, same should not be excluded from comparable list. Partly in favour of assesse.( ITA no 1501 (PN) of 2011 dt 26-05-2014)(AY. 2005-06)

Bindview India (P.) Ltd. .v. Dy. CIT (2014)48 taxmann.com 126 / (2015) 152 ITD 120  (Pune)(Trib.)

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