Case Law Details
The Delhi bench of the Income Tax Appellate Tribunal (Tribunal) recently pronounced its ruling in the case of Birlasoft (India) Ltd. Vs. Dy. CIT ITA No. 3839/DEL/2010, where the Taxpayer had determined the arm’s length price of their international transactions on the basis of internal bench marking analysis. The Tribunal upheld the transfer pricing method followed by the Taxpayer whereby the net cost plus margin earned from rendering software development and related services (“software services”) to associated enterprises (AEs) were compared with the operating profit margin earned from rendering software services to unrelated parties.
Facts
Taxpayer is a wholly owned subsidiary of Birlasoft Enterprises Ltd. India, which in turn is a wholly owned subsidiary of Birlasoft Inc., USA. The Taxpayer is engaged in the provision of software development and related services. During the assessment year (“AY”) 2006-07, the Taxpayer entered into international transactions with two of its associated enterprises (AEs) for providing software services. The Taxpayer applied transactional net margin method (“TNMM”) for determining the arm’s length price by comparing the net cost plus margin earned from rendering software services to AEs with the net cost plus margin earned from rendering software services to unrelated enterprises. As, the net cost plus margin computed by the Taxpayer with respect to the international transactions with AEs was -0.47% as against the net cost plus margin of -6.89% earned from unrelated enterprises, the Taxpayer considered the international transactions to be at arm’s length. It is pertinent to note that the transactions with associated enterprises and those with unrelated enterprises were identical.
While applying TNMM, the Taxpayer had determined the net cost plus margin with respect to the transactions with AEs and unrelated enterprises by computing its profitability in two separate segments as below:
• Actual revenues earned with respect to transactions with AEs and Non-AEs were considered for computation.
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