Brief of the case
In the case of Venture Infogain India Pvt. Ltd vs. Dy.Commissioner of Income Tax ITAT has held that provisions the Profit Split Method is applicable mainly in international transactions which are so interrelated that they cannot be evaluated separately, for the purpose of determining the arms’ length price. The combined net profit is then split amongst the enterprises in proportion to relative contribution as evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicated how such contribution would be evaluated by unrelated enterprise performing comparable functions in similar circumstances. Moreover, it is an admitted fact that in the preceding years as well as in the succeeding year i.e. assessment year 2011-12, the same method i.e. Profit Split Method has been accepted by the department. Therefore, we are of the view that the TPO/AO was not justified in applying the TNMM method instead of Profit Split Method adopted by the assessee.
Facts of the case
1. The assessee was engaged in the business of software development and filed the return of income on 30.03.2010 declaring income of Rs. 1,41,28,871/- which was processed u/s 143(1) of the IT Act, 1961. Later on the case was selected for scrutiny.
2. During the course of assessment proceedings it came to the notice of the AO that the assessee had international transactions for which the assessee had filed form no. 3 CEB as per the provisions of Section 92E of the Act relating to international Transactions in access of Rs. 5 crores. The AO as per the provisions of Sec. 92CA(3) referred the matter to the Transfer Pricing Officer (TPO) who proposed an addition of Rs. 16,86,58,151/-. The AO then proposed the draft assessment order u/s 144C(5) of the Act which was forwarded to the assessee who filed objections in Form no. 35A to the Dispute Resolution Penal (DRP) on 27.01.2012.
3. It was stated before the DRP that the entire pricing decision based on project costing estimates, resource requirements, time ommitments has entirely shifted to Infogain India (the assessee). The TP study undertaken has, on the basis of fuctions/responsibilities and based on interviews with the key management personnel of the Infogain US and Infogain India, identified the functions in the value chain of software services provided by Infogain US and Infogain India to customers based in US and assigned weightages to the functions.
4. The DRP after considering the submissions of the assessee rejected the objection of the assessee by holding that We have nowhere in the submissions, or during the course of discussion seen that the assessee has made any attempt by evaluating the contribution made by Infogain India and Infogain US on the basis of FAR of each one of them and have reliably employed any external market data which may be indicative of how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances. The moot issue here is to reasonably and reliably identify a basic return appropriate for the type of international transaction in which the parties at test are engaged, with reference to market returns achieved for similar types of transactions by independent enterprises. In none of the methods employed for determination of ALP, the issue of comparability is dispensed with. The foremost requirement of determination of ALP is to identify a comparable transaction. In the case of Profit Split Method, the way that has to be done is also mentioned. We do not find that the assessee has demonstrated this comparability anywhere. The TP Report is subjective and completely inadequate to support its conclusions. We are constrained to reject the same for the reasons given above and agree with the action of the TPO.
5. Accordingly, the DRP directed the TPO/AO u/s 144C of the Act to complete the assessment. On the directions of the DRP the AO completed the assessment vide order dated 01.10.2012 and made the adjustment.
Aggrieved against the said decision, the assessee has filed an appeal before ITAT
Issue
Whether The AO/DRP has erred on the facts and circumstances of the case and in law in rejecting/disregarding the profit split method in the Transfer Pricing and follow TNMM method the most appropriate method, while working out the Arm’s length value in respect of international transactions between Infogain India i.e. assessee and Infogain US i.e. parentcompany. And thereby made addition of Rs 145289630/- on a/c of transfer pricing adjustment.
Assessee’s contention
1. in the relevant assessment year there was a significant change in the functional matrix of the Infogain Group, with Infogain India assuming critical delivery functions and the corresponding. There was a process shift with the formation of Global Delivery Organization (GDO) in Infogain India and Client Service Organization (CSO) in Infogain US. during the initial years of the formation of Infogain Group, the execution and delivery of the software services as well as the marketing of these services was handled from Infogain US. To support such a structure, consequently all the key personnel/decision makers were stationed in Infogain US. However, gradually the fulcrum of the entire business witnessed a shift towards India. Therefore, the organizational structure was aligned by client services and delivery function and currently the team at Infogain US has been reduced to one-fourth since the conversion year.
