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01-06-2018, First Source Solutions, Section 43B, 234B, 234D, Tribunal Mumbai
Aforesaid appeal at the instance of the assessee is against order dated 29th February 2014, passed by the learned Commissioner (Appeals)–IV, Bangalore, pertaining to the assessment year 2004–05.
2. Brief facts are, the assessee an Indian company filed its return of income for the impugned assessment year on 1st February 2003, declaring nil income after set–off of brought forward loss. The Assessing Officer noticing that in the relevant previous year, the assessee has entered into international transactions with its Associated Enterprises (A.E) made a reference to the Transfer Pricing Officer (Transfer Pricing Officer) under section 92CA of the Income-tax Act, 1961 (for short "the Act") to determine the arm’s length price (ALP). As stated by the Transfer Pricing Officer, the assessee is in the business of providing Business Process Outsourcing (BPO) services to independent overseas customers. He has further stated in the process of providing such service the assessee uses the services of its A.E. in the area of marketing support services. From the audit report of the assessee, the Transfer Pricing Officer found that in the relevant previous year, assessee has earned revenue of ` 47,57,71,446, out of which an amount of ` 4,98,20,772, was paid to ICICI One Source, U.S., and ` 7,87 62,366, were paid to ICICI One Source, U.K. towards provisions of market support service. While the Transfer Pricing Officer
accepted the rest of the international transactions, he picked–up payment of marketing support service fee to the A.Es, as noted above, to find out whether they were at arm’s length. After issuing a show cause notice to the assessee and examining assessee’s objections / submissions, the Transfer Pricing Officer proceeded to determine the arm's length price of the marketing support service fees paid to the A.Es by selecting transactional net margin method (TNMM) as the most appropriate method. In fact, in this respect, the Transfer Pricing Officer agreed with the most appropriate method selected by the assessee itself. However, rejecting the profit level indicator (PLI) of the assessee of operating profit / total cost the Transfer Pricing Officer held that in case of operating profit of marketing support service the PLI should be net margin divided by marketing cost. While doing so, the Transfer Pricing Officerobserved that since the total marketing service fee paid by the assessee works out to 28% of the total cost and 27% of the sales, net margin as a percentage of total cost of sales will not be a correct indicator fo the pricing of the marketing service. By adopting the PLI of net margin divided by marketing cost, the Assessing Officer short listed two comparables and by applying the PLI of net margin to marketing cost to both the assessee and the comparables he worked out the average margin of comparables at 1.32% as against the margin of 0.22% worked out in the same manner for the assessee. Accordingly, he determined the arm's length price of the marketing cost at 2,18,54,135. The assessee having debited marketing cost of ` 12,96,17,674 in its books, the differential amount of ` 10,77,63,539 was proposed as adjustment under section 92CA of the Act. The Assessing Officer while completing the assessment added the transfer pricing adjustment proposed by the Transfer Pricing Officer. Being aggrieved of the addition made on account of transfer pricing adjustment, the assessee preferred appeal before the learned Commissioner (Appeals), inter–alia, on the ground of adoption of net margin / marketing cost as the PLI.
3. The learned Commissioner (Appeals) having not found merit in any of the grounds raised by the assessee upheld the transfer pricing adjustment made by the Transfer Pricing Officer. Notably, with regard to selection of net profit / marketing cost as PLI by the Transfer Pricing Officer, the learned Commissioner (Appeals) agreed with the reasoning of the Transfer Pricing Officer. Being aggrieved with the aforesaid decision of the learned Commissioner (Appeals), the assessee is in appeal before the Tribunal.
4. Though, in the memorandum of appeal the assessee has raised a number of grounds on transfer pricing issues (grounds no.1 to 11), however, Shri Ajit Jain, learned Authorised Representative appearing for the assessee submitted at the time of hearing that the only issue the assessee will be contesting is, adoption of net margin / marketing cost as PLI by the Transfer Pricing Officer. Learned Authorised Representative submitted, international transaction of the assessee that is required to be bench marked is payment of marketing cost to the A.Es. He submitted, since the transaction in question is that of cost, by adopting PLI of net margin / marketing cost the Transfer