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TMI Blog2014 (9) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the discounting factors with respect to credit risks because the same was considered for arriving at the discount factors with respect to project management cost - TPO had not duly considered the discounting factors with respect to long term contract and technology transfers, which was adopted by the assessee at 20.90% & 10.45% respectively. There was no merit in the order of the CIT (A), there were no discussions on the computation made by the appellant or by the TPO in his order - the discounting factors adopted considered by the assessee appears to be relevant, computations with respect to the aforesaid discounting factors are not explained and they also do not emerge from the orders of the Revenue or from the submissions and paper book submitted by the assessee - AO to adapt the discounting factor of 15% for long term contract, and 6% for technology transfer being 70% & 60% approximately as that was accepted by the assessee – the AO is directed to arrive at the ALP based on the acceptable discount factors as given in the table – the method of computation to be adopted for determining the ALP modified, and also uphold the inclusion of the salary paid to technical perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have appreciated having regard to the method adopted fully backed by mass of particulars filed by the Respondent that there is no warrant for any adjustment in respect of transactions with associated concern and hence there is no necessity for reworking as has been urged by the Respondent. 3. The brief facts of the case are that the assessee is a private limited company, incorporated during the year 1994 as an offshore development center for its holding company M/s. American Mega Trends Inc. of USA, who owns 94% of the paid up share capital of the assessee company. The assessee company is a 100% EOU registered with Software Technology Park of India engaged in the business of software development and export. The assessee company filed its return of income on 01.11.2004 declaring an income of ₹ 25,24,240/- for the assessment year 2004-05. The return was taken up for scrutiny and assessment U/s.143(3) of the Act was made on 27.12.2006 subsequent to the case being referred to the Transfer Pricing Officer (TPO) for determining the ALP wherein addition of ₹ 1,41,56,531/- was made U/s. 92CA(6) of the Act. 4. Before the Ld.TPO the assessee had worked out its ALP by ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .45% Project Management Costs 40 27.86% Credits and Credit Risk 05 3.48% TOTAL RISK FACTOR D 90% 62.69% ( C - D ) 6.96% Related Party Transfer Price Cost of Related Party Transactions 48262942.80 Add: Gross margin at 6.96% on A 3361711.00 Expected Transfer price 51624653.80 Actual Transfer price 60897171.80 Thus, the assessee had concluded that since the actual price charged to AE is higher than the expected ALP, the price charged to AE is considered to be at Arm's Length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company was incorporated only for the purpose of having an offshore development center for its holding company abroad; therefore the assessee's submission that the long term contracts with the AEs will reduce the cost cannot be accepted. 2. In long term contract the assessee could hire engineers at lower cost and train them for long term needs thereby reducing the overall cost of execution of the project. In short term contract the client has to employ engineers, who could meet the required experience and knowledge and therefore, the cost for hiring the trained engineers would be high. For the aforesaid reasons, the cost of resources for executing the contract with unrelated party would be more expensive than with the related parties. The relationship between the assessee and the assessee's AE are inter-depending and mutual. The efficiency of the AE's holding company depends upon the efficiency of the assessee's company. Therefore, there is a perpetual contract and not an extendable contract. The transactions with the assessee's AE are arranged in such a fashion that the supply of softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that there were no formal agreements between the assessee and the assessee's AE with respect to transfer of technology. There was also no evidence to substantiate that there was transfer of technology between the assessee and the assessee's AE. Moreover, the assessee had not submitted any basis for factoring 15% discount. C. Project Management Cost 1. The assessee had agreed to pay 25% of the invoice value realized to the assessee's AE as commission related to transaction with third parties in order to avoid expenses relating to marketing abroad by maintaining its own infrastructure. Therefore, by the taking note of the same % of marketing commission the assessee had worked out the project management cost related to transactions with assessee's AEs as follows:- Notional marketing commission = ₹ 1,52,24,293/ (6,08,97,172 25 100). This amount was considered as a part of direct cost for transaction related to AEs. The three factors considered for arriving at 25% of invoice value termed as marketing commission were attributed to project management, credit realization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69.65% 14.14% Credits and Credit Risk NIL Total of Adjustments 14.14% Balance 55.51% Determination of ALP Cost of Related Party Transactions 4,82,62,943.00 Add: Mark up of unrelated party transactions @ 55.51% 2,67,90,760.00 ALP 7,50,53,703.00 Actual transfer Price 6,08,97,172.00 Difference in ALP 1,41,56,531.00 8. When the matter reached the Ld. CIT (A), the Ld. CIT (A) opined that the Ld.TPO had arbitrarily arrived at the conclusion that the appellant had lowered its profit margin by diverting its profit to its parent company. He further observed that the assumption made by the Ld.TPO was baseless and on mere surmises and conjectures. Therefore, the Ld. CIT (A) deleted the addition of ₹ 1,41,56,531/-made by the Ld. Assessing Officer based on the Ld. TPO's report. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Cost 27.86% Credit and Credit Risks 3.48%. The Ld. TPO rejected these factors however, accepted the project management cost factor at 14.14%. In arriving at 14.14% discounting factors on project management cost, the Ld. TPO accepted the same method adopted by the assessee however, shifted the computation by adopting total value of sales of unrelated party with the related parties. This stand of the Ld.TPO with respect to the discounting factors on project management cost is reasonable, because when the discounting factors are considered for transactions with unrelated party, then the data with respect to unrelated party are to be taken into account for arriving at the discounting factors. The Ld.TPO had further rejected the discounting factors with respect to credit risks because the same was considered for arriving at the discount factors with respect to project management cost. This stand of the Ld.TPO is also reasonable. However, the Ld.TPO had not duly considered the discounting factors with respect to long term contract and technology transfers, which was adopted by the assessee at 20.90% 10.45% respectively. We also do not find any merit in the order of the Ld. CIT (A), ..... X X X X Extracts X X X X X X X X Extracts X X X X
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