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TMI Blog2011 (11) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... ess segment do not satisfy the arm's length principle envisaged under the Act. In doing so, the ld. DRP and the ld. AO has grossly erred in agreeing with and upholding the ld. TPO's action of: 2.1 Disregarding the arm's length price ('ALP'), as determined by the appellant in the TP documentation maintained by it in terms of sec. 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('Rules'); 2.2 Ignoring the fact that the appellant is entitled to tax holiday u/s 10A of the Act on its profits and, therefore, would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3 Holding that only current year (i.e. F.Y. 2005-06) data for comparable companies should be used for comparability analysis, despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation and in doing so, have grossly erred in; 2.3.1 Interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/single year (i.e. F.Y. 2005-06) data; and 2.4 Denying the benefit of (+/-) 5 percent [as per proviso to sec. 92C(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs; and Denying the benefit of (+/-) 5 percent range mentioned in proviso to sec. 92C(2) of the Act while computing the ALP. Disregarding judicial pronouncements in India in undertaking the TP adjustment. 3. On the facts and in the circumstances of the case and in law, the ld. AO erred in initiating penalty proceedings u/s 271(1)(c) read with sec. 274 of the Act. The above grounds are without prejudice to each other. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing." 3. The assessee in this case is a wholly and subsidiary of Agilent Technologies Europe BV, and is registered under the Software Technology Parks of India ('STPI') scheme formulated by the Government of India and thus, entitled to deduction u/s 10A. The assessee is engaged in the business of provision of software development services and IT Enabled services to its overseas group companies in the Indian Territory. It is a limited risk bearing captive service provider. In r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment segment was lower than the lowest permissible limit of 20.26%, the TPO concluded that the appellant's international transactions pertaining to software development segment do not meet the arm's length standard. Similarly, considering that the assessee's OP/TC margin of 12.44% earned from the ITES segment was lower than the lowest permissible limit of 13.25%, the ld. TPO concluded that the appellant's international transaction pertaining to the ITES segment do not meet the arm's length standard. Vide order dated 24/11/2009, the ld. AO/TPO proposed the following additions to the appellant's income on arm's length price: S.No. Nature of Adjustment Amount (in Rs.) Margin of assessee Arm's length margin by TPO 1. For software development services segment 2,98,88,912 13.57% 26.59% 2. For IT Enabled Services 5,70,25,104 12.44% 19.22% Total Adjustment 8,69,08,016 II. Proceedings before DRP The adjustment in respect of the software development has been reduced by the DRP by rejecting the Satyam Computer as comparable for software development as its financial results are not realistic and reduced the arm's length margin to 21.7% by restricting c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable in its Transfer Price Study, it is entitled to point out to the Tribunal that the above enterprise was wrongly taken as comparable and the assessee is not estopped from pointing out a mistake in the assessment even though such mistake is the result of the evidence adduced by the taxpayer. 7. Ld. Counsel had further argued that there is a violation of principles of natural justice by not providing the assessee the precise basis/reasons for selecting the wages/filter range of 50-70% and thereby denying the assessee an opportunity of the examining the said basis/reasons and providing its response thereto. 7.1 It has further been submitted that wages to sales of Infosys is 47.2% as given in the annual report of Infosys and hence, it should be excluded on that score, as the TPO has applied wages filter of range 50-70%. Ld. Counsel argued that these points were duly agitated before the DRP & TPO and have not been dealt with in proper speaking order. 8. Ld. Counsel had further urged that in any event the benefit of +/- 5% range is available to the assessee as per old proviso to sec. 92C(2) of the Act. It has been claimed that without prejudice to all the other objections raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and Satyam Software Services Ltd. in the comparable set in complete disregard of the fact that there is sufficient evidence available in public domain to demonstrate that the functional data of Satyam Software Services Ltd. was not reliable for F.Y. 2005-06. The assessee has also submitted that the TPO failed to apply wages/ sales ratio filter in ITES segment, erroneously retained Allsec Technologies Ltd. in the final comparable set, though it was functionally uncomparable, applied turnover filter of Rs. 5 crores, denied the benefit of working capital adjustment and the risk adjustment. 2.3 The submissions made by the assessee are correct to some extent. The functional data of Satyam Software Services Ltd. for F.Y. 2005-06 is not reliable, hence, the same is removed from the computation of OP/OC for determining the Arm's length price of international transaction relating to Software Development Segment. Another submission of the assessee relating to application of various filters by the TPO in both the segment has not been found correct. The TPO has given detailed reasoning and selecting the various filters. The TPO has not selected new comparables but have short listed some ..... X X X X Extracts X X X X X X X X Extracts X X X X
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