No restriction in considering companies with either abnormal profits / losses as comparable to tested party, as long as they are functionally comparable
IN THE ITAT BANGALORE BENCH ‘A’
Trilogy E-Business Software India (P.) Ltd.
Versus
Deputy Commissioner of Income-tax
IT APPEAL NO. 1054 (BANG.) OF 2011
[ASSESSMENT YEAR 2007-08]
NOVEMBER 23, 2012
ORDER
N.V. Vasudevan, Judicial Member
This appeal by the assessee is against the order dated 30.09.2011 of the Dy.CIT, Circle 12(4), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act.
2. Ground Nos. 1 to 16 raised by the assessee is with regard to the addition to the total income by way of adjustment to the Arms’ Length Price (“ALP”) to an international transaction carried out by the assessee u/s. 92CA of the Act. These grounds read as follows:-
“The learned Assessing Officer, learned Transfer Pricing Officer and Honorable Dispute Resolution Panel have erred in :-
1. passing the Order which is bad in law;
2. passing the order disregarding the principles of natural justice;
3. making a reference to Transfer Pricing Officer for determining arms’ length price;
4. passing the order without demonstrating that appellant had motive of tax evasion;
5. ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law;
6. not appreciating that the charging or computation provision relating to income under the head “Profits & Gains of Business or Profession” do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law;
7. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned;
8. rejecting the comparables selected by the appellant and rejecting transfer pricing analysis of the appellant;
9. performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis;
10. selecting inappropriate comparables;
11. rejecting additional comparables proposed by the appellant;
12. inappropriately computing the operating margins of comparables and the appellant;
13. treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost;
14. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies;
15. not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only;
16. not allowing the benefit of the +/-5% range mentioned in the proviso to section 92C(2).”
3. The assessee is a company. It was incorporated in June, 2000. M/s. Versata International Inc., USA holds the entire share capital of the assessee, except two shares. The assessee provides software research & development services for Versata International Inc. on a contract basis and as requested by Versata International Inc. It is not in dispute before us that the transaction of providing software research & development support services by the Assessee to Versata International Inc., was an international transaction with the Associated Enterprise “(“AE”) and therefore the price at which the assessee renders services to its AE has to pass the Arm’s Length Price (ALP) test as laid down by section 92C of the Act. During the financial year 2006-07, the assessee provided software research & development support services to its AE and was remunerated on a ‘cost plus’ basis. The total value of international transaction with respect to the provision of software research & development support services by the assessee to its AE was Rs. 47,46,66,638.
4. In support of the assessee’s claim that the price charged by it for services rendered to its AE was at arms’ length, the assessee filed a report as required by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted the Transactional Net Margin Method (“TNMM”) as the most appropriate method for determining the ALP. The assessee adopted operating profits to cost as the Profit Level Indicator (“PLI”). The list of comparables ultimately chosen by the assessee for comparability is annexed as Annexure-I to this order and the process by which the same was arrived at is detailed in the Annexure to the report in Form 3EB. The PLI of the assessee as arrived at in the said report is annexed as Annexure-II to this order. It can be seen from Annexure-I that the arithmetic mean of comparables was computed at 14.53%. The PLI of the assessee (as per Annexure-II) was computed at 9.98%. It was the claim of the assessee that exercising the option of determining the ALP between +/- 5% of the arithmetic mean of the comparable prices, the range of operating margin would be between 8.80% & 20.25% on operating costs. Since the assessee’s operating margin on operating cost was within the arms’ length range, the assessee claimed that its international transaction was at arms’ length.
5. The filters or criteria adopted by the tax payer in its TP study and the remarks of the Transfer Pricing Officer (“TPO”) to whom the AO referred determining of ALP on such approach were as follows:-
“Filters or criteria adopted by the taxpayer in its TP study:
