2011 (6) TMI 385 - AT - Income Tax

Transfer pricing - ALP - transfer pricing adjustment made on provision of technical service and provisions of back office support services by the assessee to it s A.Es. - assessee adopted aggregation approach and submitted that operations (a) application research at BRDTC; (b) application of technical development services; and (c) promoting the licensing of technology. put together generated 13.13 per cent - TPO rejected the aggregation approach - Held that - We do not understand as to how carrying on application research at BRDTC can be clubbed with, the activity of promoting the licensing of technology owned by the overseas group entity. We note that the A.E. reimbursed only the cost incurred by BRDTC on research. No mark-up is given. Not charging mark-up on application research at BRDTC, in our opinion, justifies transfer pricing adjustment in this case. No part of the income derived by the A.E. from the activity of application research at BRDTC is given to the assessee. The entire benefit of the activity are taken by the A.Es only. Whether the data of one year has to be taken or multiple year data has to be taken - Rule 10B(4) of the I.T. Rules, 1962 - Held that - In the absence of the assessee specifically demonstrating that the data of the prior financial year reveals fact which influence the determination of the transfer price of the transactions being compared, the question of taking into consideration data other than the current year s data does not arise. Rejection of loss making comparables - Held that - TPO has rightly rejected comparable of ADS Diagnostics Ltd. on the ground that comparison itself is flawed for the reason that enterprise level profits are taken for comparison. The actual margin of servicing segment has not been identified. The main income is from scanning. The function of the assessee is not akin to scanning. Further rejection of NMI (Asia) Ltd is also justified on ground that figures are abnormal and without explaining a huge fall in profits as compared to the fall in turnover. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. Grant of adjustments - working capital adjustment and risk adjustment while arriving at ALP - Held that - Since assessee has not worked out the risk adjustment and as the Assessing Officer has already allowed 0.47 per cent as working capital adjustment, we are of the opinion that no further adjustment is necessary. Determination of ALP of back office support services - Held that - Since margin of assessee falls within plus minus 5 per cent of arithmetic mean of comparable companies, hence, no adjustment is required - Decided partly in favor of assessee.

Issues Involved:
1. Transfer pricing adjustment on provision of technical services.
2. Transfer pricing adjustment on provision of back office support services.
3. Exclusion of loss-making comparables.
4. Consideration of working capital and risk adjustments.
5. Compliance with Dispute Resolution Panel (DRP) directions.

Detailed Analysis:

1. Transfer Pricing Adjustment on Provision of Technical Services:
The TPO aggregated various technical services into one category (total amount Rs. 6,28,71,633) and observed that the assessee did not receive separate compensation for services rendered at the Bangalore Research and Development Technology Centre (BRDTC) amounting to Rs. 4,98,14,572. The TPO rejected the assessee's allocation of costs towards marketing services as financial jugglery to improve margins for the technical segment. The TPO concluded that the transactions were not at arm's length and proposed an addition of Rs. 1,39,18,191.

2. Transfer Pricing Adjustment on Provision of Back Office Support Services:
The TPO noted that the segmental results showed a mark-up of 21.3% as against the agreed compensation of 10%. The TPO rejected the assessee's explanation for the variation and proposed an adjustment of Rs. 55,25,877. The DRP directed the Assessing Officer to compare the average mean worked out by him with the 21% actual profit shown by the assessee and apply the +/- 5% range. The Assessing Officer, however, retained the adjustment.

3. Exclusion of Loss-Making Comparables:
The TPO rejected ADS Diagnostic Ltd. and Neeman Medical International (Asia) Ltd. as comparables. The assessee argued that these companies were functionally comparable despite their losses. The Tribunal upheld the TPO's rejection, stating that the loss-making units were not comparable due to specific reasons like competition and abnormal profitability changes.

4. Consideration of Working Capital and Risk Adjustments:
The assessee did not press for working capital and risk adjustments. The TPO had already allowed a 0.47% working capital adjustment, and no further adjustments were deemed necessary.

5. Compliance with DRP Directions:
The DRP directed the Assessing Officer to compare the average mean worked out by him with the 21% actual profit shown by the assessee and apply the +/- 5% range. The Tribunal held that the Assessing Officer must follow the DRP's directions. The Tribunal found that the actual income of Rs. 4,21,23,805 was within the +/- 5% range of the ALP, and thus, no adjustment was required.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the Assessing Officer to follow the DRP's directions and delete the adjustments made on back office support services. The Tribunal upheld the TPO's rejection of loss-making comparables and did not allow further working capital and risk adjustments.

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