Brief of the case:
In the case of M/s. Cash Edge India (Pvt.) Ltd., vs. ITO Delhi Bench of ITAT have held that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act.
Facts of the case:
- Assessee rendered software development and business support services to its AE viz. CashEdge Inc., USA. For this it was compensated based on the terms of the Professional Services Agreement dated 31.12.2003 entered between both the entities on cost plus basis.
- Assessee has entered into international transaction in term of Rendering software development services of Rs. 13,10,68,578/-. ALP is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances of the case.
- The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee is arrived at 11.16% on cost; whereas the average PLI of the comparables is arrived at 6.90% as per the analysis in the TP document. PLI was directed on the basis of 14 comparables selected by assessee.
- The mean margin of the comparables selected by the assessee as stated above was 11.91% and since the profit margin of the assessee was within +/- 5% range of the mean margin of the comparables, no transfer pricing adjustment was offered in the return of income.
- The TPO rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparable selected by the assessee.
- TPO selected a list of 10 comparables and proposed an adjustment of Rs.1,47,63,279/- by computing the mean Profit Level Indicator (PLI) of the comparable companies at 23.68% as against PLI of 11.16% of the assessee.
- The final assessment was completed u/s 143(3) r.w.s. 144C assessing the total income of the assessee at Rs.1,18,99,030/- under normal provisions of the Act and Rs.2,56,61,736/- under MAT after making a transfer pricing addition of Rs.1,18,93,468/-.
(c) Addition of transfer pricing adjustment to income assessed under Section 115JB (MAT).
Held by DRP:
♠ DRP upheld the adjustment made by the TPO, subject to –
a. exclusion of two comparables,
b. the claim of working capital adjustment as per the OECD Methodology,
c. furnishing the annual report of Wipro Technology Services Ltd. to the assessee and
d. directed to re-compute the operating margin of the assessee as well as comparable companies as per the guidelines provided by Safe Harbor Notification dated 18.09.2013.
Contention of the assessee:
♣ All the contentions and issue raised are confined to three main issues:
(a) Exclusion of the following comparables from the list which was finally selected by the DRP:
i. Persistent Systems Ltd.
ii. Wipro Technology Services Ltd.
iii. Zylog Systems Ltd.
(b) treatment of foreign exchange fluctuation gain/loss as operating item; and
(c) furnishing the annual report of Wipro Technology Services Ltd. to the assessee and
(d) directed to re-compute the operating margin of the assessee as well as comparable companies as per the guidelines provided by Safe Harbor Notification dated 18.09.2013.
Comparabilities of the companies:
Persistent Systems Ltd.
