Telcordia Technologies India P. Ltd. Vs ACIT (ITAT Mumbai)
Telcordia Technologies India Pvt. Ltd., a wholly owned subsidiary of Telcordia Technologies Inc., USA, was engaged in marketing, technical support and software development related services in India. It operated as a captive service provider and received compensation equal to its operating costs plus a 15% mark-up.
For software development and related services, the assessee adopted the Transaction Net Margin Method (TNMM) and Return on Total Costs as the Profit Level Indicator. Its operating margin was 15%, while the comparable companies selected in its Transfer Pricing Study showed an average margin of 12.67%.
The Transfer Pricing Officer (TPO) rejected the assessee’s comparables and selected 28 companies, with an arithmetic mean margin of 27.96%. Following the Dispute Resolution Panel’s (DRP) directions concerning three comparables, the final set consisted of 27 companies with an arithmetic mean margin of 24.72%. This resulted in a transfer pricing adjustment of Rs.88,49,974/-.
Before the Tribunal, the assessee challenged eight of the 27 comparables.
The assessee accepted R Systems as a comparable but disputed the TPO’s computation of its operating profit, contending that provisions for doubtful debts and doubtful advances should be treated as operating expenses.
The Tribunal rejected this contention. It held that doubtful debts and doubtful advances could not be regarded as normal and direct operating expenses because they depended on various factors relating to business transactions. However, the Tribunal directed the TPO to verify the discrepancy in the figures of provisions for doubtful debts and doubtful advances pointed out by the assessee.
