IN THE ITAT MUMBAI BENCH ‘B’
Lionbridge Technologies (P.) Ltd.
V/s.
Deputy Commissioner of Income-tax
IT Appeal No. 9032 (Mum.) of 2010
[Assessment Year 2006-07]
JUNE 20, 2012
ORDER
R.S. Syal, Accountant Member – This appeal by the assessee is directed against the order passed by the DCIT u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter called the ‘Act’) on 07.10.2010 in relation to the assessment year 2006-07.
2. The major issue in this appeal is against the confirmation of addition of Rs. 8,86,68,683 on account of transfer pricing adjustment u/s 92CA(3) of the Act. Briefly stated the facts of the case are that the assessee is a company engaged in the development and sale of computer software and providing other related services. It filed its return on 21.10.2006 declaring total income of Rs. 87,64,611. Thereafter, the assessee e-filed revised return on 24.10.2006 declaring total income of Rs. 87,64,536. From the Form No.3CEB submitted by the assessee along with the return of income, the A.O. observed that the assessee entered into various international transactions with its Associated Enterprises (hereinafter called “AEs”). The A.O. made a reference u/s 92CA(1) to the Transfer Pricing Officer (hereinafter called “TPO”) for the determination of Arm’s Length Price (hereinafter called “ALP”) in relation to the international transactions. The TPO noticed that the assessee entered into 10 types of international transactions with its AEs. The entire dispute in the present appeal revolves around the first type of transactions being “Receipt of fees towards Information Technology (IT)/Information Technology Enabled Services (ITES)” reported by the assessee at Rs. 31,53,20,904. The assessee used Transactional Net Margin Method (hereinafter called “TNMM”) for the purposes of determination of ALP. In support of its ALP, the assessee furnished transfer pricing report. All international transactions with its AEs were put in one basket with respect to IT services, IT enabled services (hereinafter called ‘ITES’) and marketing & support services. The TPO observed that the main transactions were of the nature of IT and ITES. On the basis of search from Prowess and Capitaline Databases, the assessee identified 43 companies as comparables which have been tabulated on pages 3 and 4 of the TPO’s order. After considering the two years’ weighted average profit of such comparable cases, the assessee determined Profit Level Indicator (Operating Profit/Total Cost) margin in respect of such comparable cases at 17.20%. As against this benchmarked profit percentage, the assessee had disclosed its actual margin as per the books of account at 12.53% on overall basis, divided into 16.77% from the international transactions with the AEs and 10.80% from the transactions with Non-AEs. After exercising option u/s 92C(2), it was declared that the price charged by the assessee from its AEs was at arm’s length.
3. The TPO observed that the assessee adopted two years’ data to work out weighted average for computing PLI of Operating profit/Total cost of comparable companies, which was not in accordance with rule 10D(4). In his opinion, the requirement was to adopt the relevant year’s financials alone. During the course of proceedings before the TPO, it was stated on behalf of the assessee that even going by the internal comparables, it earned OP/TC margin of 16.77% from its AEs, which was higher than its OP/TP margin of 10.80% from its non-AEs, warranting no adjustment. The assessee also furnished its updated margin of comparable companies on the basis of Transfer Pricing report for financial year 2005-2006 alone at 17.36%. The TPO observed that the price charged by the assessee for providing IT/ITES was not determined in accordance with the provisions of section 92C(1) and (2). He noticed that the type of services offered to AEs were not the same as those offered to non-AEs and hence the comparison of margins between AEs and non-AEs was irrelevant. The assessee was specifically asked to clarify whether all the services rendered by it were in the nature of software development or in the nature of ITES. The assessee submitted that its service to AEs as well as non-AEs were ITES as it was not engaged in any high-end application software development. Considering the assessee’s submissions and taking into account the nature of services rendered by the assessee, the TPO categorized the services rendered by the assessee as IT/ITES. Thereafter, he took up the task of finding comparable cases in the category of IT/ITES. From the Prowess and Capitaline Databases, the TPO, after eliminating certain cases initially chosen, finally short-listed 33 companies which were declared as comparable. The list of such 33 companies with the amount of Turnover and PLI (OP to TC) in percentage has been tabulated on pages 12 and 13 of the TPO’s order. From such tabulation, the TPO worked out average OP/TC margin of the combined IT/ITES comparable companies at 21.99%. This PLI was used by the TPO as arm’s length margin to work out the amount of the proposed adjustment on account of transfer pricing in assessee’s case. Here it is important to mention that the assessee raised various objections to some of the cases chosen by the TPO as comparables. Such objections of the assessee and the remarks of the TPO have been incorporated on pages 13 to 17 of his order. After rejecting the assessee’s objections in this regard, the TPO concluded that the comparable companies finally selected by the him, represented the IT/ITES industry in a true sense. In this way, the TPO proceeded to compute the amount of adjustment at Rs. 8.86 crore as under:-
TABLE – A
