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TMI Blog2011 (1) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Ltd. that the said company has sufficient related party transaction, but the TPO has brushed the contention by ignoring the documents submitted by the assessee and holding that data available with him does not show details of related party transaction. It is undisputed that these three companies have shown supernormal comparable profits as compared to the other comparable. There exclusion from the list of comparable is quite correct. By excluding these three companies from the comparables and showing the computation on the basis of TPO data the arithmetic mean of OP/OC to 17.15% which falls within the +-5% range as permitted by section 92(C)(2). As assessee has made voluminous submissions including paper books before the DRP who h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is showing OP/Cost Margin of 14.96% which he considered to be quite low, as compared to other companies which are engaged in similar IT fields. The TPO in this case passed a Transfer Pricing order making a upward adjustment of ₹ 10,40,75,727/- on the arms length price of the international transactions. The TPO had worked out the average of arithmetic mean of ALP (OP/OC) of 42 comparables at the average of 24.91 percent. The Arm s Length Price of international transaction was determined as under:- Operating Revenue ₹ 110,31,15,603 (A) Total cost ₹ 96,64,48,907/- (B) Operating Profit ₹ 13,66,66,696 (C) Arm s Length Price of Operating ₹ 24,07,42,423 (D) Profit 2 24.91% Adjustment (D-C) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware . On review of this Annual Report (attached as Annexure 4) for FY 2006-07 (as annual report for FY 2005-06 is not available) it is observed as follows:- Page 64 of the Annual Report, .,your company has carried out IC design, systems design, software development and PCB layout for several global customers. Page 64 of the Annual Report, The company has also started offshore Design Centres during the year for customers based out of US. The company has developed office in a Box, several Field Programmable Gage Array boards, Gigabit Passive Optical Network) during the year. Based on the above, it is evident that the company is primarily engaged in developing and licensing of products which are not similar to the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the Jayamaruthi Software Systems Limited was as under:- This company was rejected by the assessee in its transfer pricing documentation, on the ground that this company is functionally not comparable . The company has negligible employee cost, i.e. 0.01 cores on turnover of 5.69 crores which is extraordinarily low for a service company. Moreover, the company s annual report is not available to validate its cost structure. Given the abnormal cost structure it is not prudent to rely on the financial statements of the company. Hence, the company should be rejected on this basis. Additionally, the assessee would like to bring to your attention that supernormal profit making companies should be excluded from the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Technology Associates, The Mathworks, Texas Instruments and IBM . Accordingly, Cranes is a product based company and owns proprietary products and cannot be compared with the assessee who undertakes only routine functions in developing modules of software and does not own any intangibles in this regard. Further, as per the depreciation schedule of the company for FY 2005-06, out of the total net assets value of ₹ 148.54 cr., the value of intangible (computer software) is ₹ 136.70 cr. The presence of intangibles in the balance sheet of Cranes clearly shows that, it is performing significant research and development activities to develop intangibles. Accordingly, it cannot be considered as being comparable to the assessee whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly M/s GDA Technologies Ltd. is included in the departmental list of comparables. 4.5 Apart from rejecting some of the comparables and adding some more comparables, the Assessing Officer also used updated data for financial year 2005-06 instead of mean (weighted ALP of earlier years) as computed by the assessee. Ld. counsel of the assessee in this regard submitted no adjustment has been made to the assessee s transfer pricing in earlier years and assessment was done u/s 143(3) of the IT Act. He submitted before us that even if the data considered by Assessing Officer is used excluding companies with super normal profits the arithmetic mean of OP/OC will be 17.15% which will fall within the + - 5% range as permitted by section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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