Brief of the case
In the case of HCL Technologies BPO Services Ltd vs. ACIT, ITAT has held that for transfer pricing only amount retained by associates from end user is to be taken into account for transfer pricing adjustment, and to adjust operating cost by excluding abnormal cost incurred on a/c of Startup Company like salary, rent, and depreciation.
Facts of the case
1. The brief facts of the case are that the appellant is a private limited company and is engaged in providing IT Enabled Services (ITES) e.g. voice/web based contact and front office services (hereinafter referred as business process outsourcing (BPO) services). For the relevant previous year, the return of income of the appellant was filed declaring loss of Rs.12,85,57,867/-. The appellant had during the relevant previous year entered into the international transaction of provision of information technology enabled services, amounting to Rs.13,06,79,399/- with the various associated enterprises. For application of TNMM, the appellant was considered to be the tested party and operating profit/total cost was taken as the profit level indicator (PLI).
2. The operating results of the appellant were computed as follows:
| Operating income | 209,032,558 |
| Less: Operating expenses | |
| Personnel expenses | 13,38,59,484 |
| Administration selling & other | 15,13,90,147 |
| Finance charges | 7,68,060 |
| Depreciation | 4,42,53,507 |
| Miscellaneous expense written off | 37,71,203 |
| Total Operating Cost | 33,40,42,401 |
| Operating profit | (-)12,50,09,843 |
| Operating profit ratio | (-)37.34% |
3 .The assessee had conducted transfer pricing analysis by using multiple year data of previous financial year in which data of the 3 years is on actual basis and for 2 years on project basis. The appellant also selected the TNMM to determine the arms length price for the transactions with AE on transactions and for the application of TNMM, the appellant selected operating profit /on total cost was taken as profit level indicator (PLI).
4. For application of TNMM, the appellant identified the eight comparable companies engaged in rendering voice based I web based BPO/ITES. Further, the appellant considered the Profit Level Indicator (“PLI”), i.e., Operating Profit /Total Cost of the comparable companies for the financial years 2001-02 and 2002-03
5. The actual operating profits margin (OPITC) was· (-) 37.35% in the financial year 2002-03, (-)2.94% in 2003-04 and (+)20.94% in 2004-05. Further, the projected operating profits margin (OPITC) was 19.14% in the financial year 2005-06 and 18.29% in 2006-07. The weighted average operating margin or these five financial years was computed as 14.09%. The weighted operating” profit on total cost margin of 14-.09% during the abovementioned financial ears, being higher than that of the comparable companies at 13.56%, the “international transactions” of rendering business process outsourcing services were considered being at arm’s length.
6. On noting of above transactions, the A.O. made reference to transfer pricing officer. The Transfer Pricing Officer (TPO), however, in his order held that the arm’s length operating profit to the total cost ratio in the above business being 13.56%, viz., average operating profit / cost margin of 8 companies was considered as comparable by the TPO. The TPO accordingly, in the order passed under section 92CA(3) of the Act, determined adjustment of Rs. 17,03,05,993 to the arm’s length price of’ ‘international transactions’ of provision of business process outsourcing services applying TNMM,as under:
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