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2013 (11) TMI 189 - AT - Income TaxTransfer Pricing Adjustment Held that - The TPO was directed to verify the claim made by the assessee whether the sum was already excluded and thereafter, arrived at the operating income - If the operating income was arrived at after excluding by the assessee in TP study, then no further reduction of the said amount was warranted - Hence, this issue was restored to the file of Assessing Officer/TPO for verification and necessary action, if required. No submissions/arguments were raised in the course of hearing with regard to other issues of TP adjustment, apart from the above discussed issues - Hence, the issue related to rejection of use of non-contemporaneous data, the TPO s action in taking recourse under section 133(6) without giving an opportunity of cross examination to the assessee, filter of onsite turnover 75% etc. are not considered/ adjudicated. Calculation of operating income and net margin - The Assessing Officer/TPO was directed to work out the ALP of the assessee in accordance with the directions of the Bench and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment was required to be made to the reported value of the assessee s transaction with its AE. Due to non-availability of full information about the segmental details as to how much was the sale of product and how much was from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee - Neither the TPO nor the DRP have noticed that there was bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding had been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - The Assessing Officer/TPO to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07.
Issues Involved:
1. Transfer pricing adjustment of Rs.3,25,82,272/- made by the Transfer Pricing Officer (TPO). Detailed Analysis: 1. Transfer Pricing Adjustment: Background: The assessee, a subsidiary of Somero Enterprise Inc., Mauritius, engaged in software services, had international transactions with associated enterprises. The assessee adopted the Transaction Net Margin Method (TNMM) and selected 17 comparables, arriving at an operating margin of 11.81%. The TPO, however, selected 26 comparables and fixed the arithmetical mean at 25.07%, resulting in an adjustment of Rs.3,25,82,272/- under section 92CA of the Act. Assessee's Contentions: - The TPO's rejection of multiple years' data and reliance on Section 133(6) without cross-examination was erroneous. - The TPO's application of the Related Party Transactions (RPT) filter (>25%) was against the Tribunal's reasonable limit of 15%. - The TPO's failure to apply an upper limit to sales turnover and selection of functionally dissimilar comparables was against Tribunal rulings. - The TPO's reduction of Rs.6,19,336/- from operating income was unwarranted as the assessee had already excluded this amount in its TP study. Tribunal's Findings: Turnover Filter: The Tribunal emphasized the importance of the turnover filter, referencing the ICAI TP guidance note and previous Tribunal decisions. Companies with turnover exceeding Rs.200 crores were excluded, including: - Flextronics Software Systems Limited - iGate Global Solutions Limited - Mindtree Limited - Persistent Systems Limited - Sasken Communication Technologies Limited - Tata Elxsi Limited - Wipro Limited - Infosys Technologies Limited Functional Dissimilarity: The Tribunal rejected the following companies for functional dissimilarity, aligning with previous Tribunal decisions: - Accel Transmatic Ltd. (Seg) - Avani Cimcon Technologies Ltd - Celestial Labs. Ltd - KALS Information Systems Ltd (Seg) - Lucid Software Limited Related Party Transactions: The Tribunal directed the exclusion of Ishir Infotech Limited due to RPT exceeding 15%, following the Tribunal's decision in 24/7 Customer Com (P.) Ltd. Calculation of Operating Income and Net Margin: The Tribunal directed the TPO to verify the assessee's claim that Rs.6,19,336/- was already excluded from the operating income. If verified, no further reduction was warranted, potentially adjusting the net margin to 12.2%. Conclusion: The Tribunal directed the Assessing Officer/TPO to work out the ALP in accordance with the Tribunal's directions. If the differential in the margin of the assessee and comparables exceeded the 5% bandwidth, an adjustment was required. The assessee's appeal was partly allowed. Final Pronouncement: The order was pronounced on the 22nd day of February, 2013 at Bangalore.
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