ITAT Delhi held that a captive service provider assuming minimal risks, cannot be compared to a large company like Infosys Technologies Limited which assumes all risks leading to greater rewards.
Facts of the case
- · The taxpayer is a wholly owned subsidiary of Bay Packets Inc., USA and is engaged in the business of software development in the field of telecommunication for its parent company. The taxpayer also enjoys a tax holiday.
- · The taxpayer operating at a net profit margin of 17 percent over costs, identified 23 comparable in the TP documentation resulting in arm’s length net profit margin of 10 percent over costs.
- · The Transfer Pricing Officer (TPO) rejected few comparable identified by the taxpayer on the basis of functional dissimilarity and wages/ sales ratio. The TPO also included Infosys Technologies Limited (Infosys) and Satyam Computers Services Ltd. (Satyam) as comparables and thereby determined the arms length net profit margin at 27.08 percent over costs.
- · On objections raised by the taxpayer before the Dispute Resolution Panel (DRP), Satyam was excluded by the DRP since the data available was not reliable. However, Infosys was retained, leading to an arm’s length net profit margin of 25.6 percent over costs.
- · Against the order of the assessing officer, an appeal was filed by the taxpayer to the Income Tax Appellate Tribunal (the Tribunal).
Tribunal’s Ruling
The Tribunal ruled in favor of the taxpayer. The key aspects of Tribunal’s order are summarized below:
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