×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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10-05-2019, Golden Source India, Section 144C(13), Tribunal Mumbai
Aforesaid cross appeals arise out of the final assessment order dated 26th December 2013, passed under section 143(3) r/w section 144C(13) of the Income-tax Act, 1961 (for short "the Act") for the assessment year 2009–10, in pursuance to the directions of the Dispute Resolution Panel–I (DRP), Mumbai.
2. In this appeal, the Revenue has challenged the decision of learned DRP in excluding Genesys International Corporation Ltd. and Infinite Data Systems Ltd., from the list of comparables selected by the Transfer Pricing Officer.
3. Brief facts are, the assessee, an Indian company, is a wholly owned subsidiary of Golden Source Corporation, USA. As stated by the Transfer Pricing Officer, the assessee is involved in providing software service including coding, integration and testing, etc., to its Associated Enterprise (AE) only. In other words, the assessee is a captive service provider. In the previous year relevant to the assessment year under dispute, the assessee provided services to its overseas AE and earned revenue of ` 20,42,05,216. In the transfer pricing study report, the assessee benchmarked the international transaction with the AEs by applying Transactional Net Margin Method (TNMM) as the most appropriate method with net cost plus margin (operating profit / total cost ratio) as the Profit Level Indicator (PLI). For the purpose of benchmarking the arm's length price, the assessee selected 10 companies as comparable with arithmetic mean of 14.93% before working capital adjustment. Since the margin shown by the assessee at 12.03% before working capital adjustment was within ±5% range of the arithmetic mean of the comparables, the assessee claimed the price charged to the AEs for provision of software service to be at arm's length. The Assessing Officer, however, did not accept the transfer pricing study report and the comparables selected by the assessee. Out of the 10 comparables selected, the Transfer Pricing Officer accepted seven while rejecting three comparables. Further, the Transfer Pricing Officer, on his own, selected new comparables and the
final set of comparables selected by the Transfer Pricing Officer comprised of 11 companies with arithmetic mean of 26.95%. Applying the arithmetic mean of selected comparables, the Transfer Pricing Officer ultimately determined the arm's length price of the software service provided to the AEs at ` 23,13,96,112, resulting in an upward adjustment of ` 2,71,90,896 to the arm's length price shown by the assessee. The adjustment proposed by the Transfer Pricing Officer was added back in the draft assessment order. Against the draft assessment order assessee raised objections before learned DRP.
4. The major ground of challenged before learned DRP was with regard to selection / rejection of comparables and non consideration of assessee’s claim for working capital adjustment. Learned DRP after considering the submissions of the assessee in the context of facts and material on record, granted partial relief to the assessee by excluding two of the comparables selected by the Transfer Pricing Officer viz. Genesys International Corporation Ltd. and Infinite Data Systems Ltd.
5. The learned Departmental Representative submitted, Genesys International Corporation Ltd., is in the same line of business as the assessee. Drawing our attention to the functional profile of this company as described in the annual report, a copy of which is placed in the paper book, learned Departmental Representative submitted that this company is also providing software service. Though, it may be involved in software development in different areas. Thus, he submitted, the company being functionally similar to the assessee should have been retained as a comparable. Insofar as Infinite Data Systems Ltd. is concerned, learned Departmental Representative submitted, it is a cost plus entity like the assessee and is also involved in design and development of software. In this context, he drew our attention to the annual report of the company placed in the paper