Transfer Pricing: Suggested Operating Profit Margins for IT and ITeS Sector having Turnover between Rs. 50 lakhs to Rs. 50 crores

This is high time for the entities which have to comply with the provisions of Transfer Pricing (TP) under Income-tax Act, 1961 (the Act) i.e. only 5 days left for filing of the various forms under the Act as the due date is 30th November, 2019 for AY 2019-20. There are six methods prescribed under the as per section 92C(1) of the Act, which are:

a. Comparable Uncontrolled Price Method (CUPM);

b. Resale Price Method (RPM);

c. Cost Plus Method (CPM);

d. Profit Split Method (PSM);

e. Transactional Net Margin Method (TNMM); and

f. Any Other Method.

Out of the above methods the most commonly used method is TNMM.

Now as India being one of the World’s biggest IT outsourcing hubs, has various assessees operating into the IT sector which are having associated entities/ enterprises (AEs) overseas mainly in USA and UK. Majority of such Indian entities have turnover between Rs. 50 lakhs to Rs. 50 crores. The most common arrangement between them is that the Indian entity provides services exclusively to its overseas AEs and very rarely to the 3rd Parties or Non-AEs.

So, for the companies operating in this sector we have conducted a comparable search process using the database in the Capitaline software for the same for the companies having following criteria:

For AY 2019-20

Industries Selected:

  • IT Enabled Services/ Business Process Outsourcing
  • Computers – Software – Converts
  • Computers – Software – Large
  • Computers – Software – Medium / Small
  • Infotech / Database
 

Sr. No.

Criteria No. of Companies passing the Criterion Explanation
1. Total entities whose data available 692 Companies which are primarily classified in above mentioned Industries.
2. Availability of Data for FY 2018 and 2019 586 Number of companies for which data was available for the year ended March 31, 2018 as well as March 31, 2019 considered.
3. Turnover filter – Total Net Sales > Rs. 0.5 crores and< Rs. 50 crores (10 times less to 10 times more of the 5 crores) 213 Companies which have sales in the range of the tested entity (Net sales or turnover of tested entity taken as Rs. 5 crores).
4. Export Sales>75% of Total Sales 29 Companies engaged in predominantly export sales have been selected.
5. Employee Cost > 40% of Net Sales or Turnover 26 Companies having employee cost of more than 40% w.r.t. net sales or turnover have been selected.

Sr. No. Weighted Average Operating Profit to Operating Revenue (%) Weighted Average Operating Profit to Operating Cost (%)
1 -5.79 -5.48
2 -3.46 -3.34
3 0.54 0.54
4 3.05 3.15
5 3.24 3.35
6 3.42 3.54
7 5.91 6.28
8 7.81 8.47
9 12.26 13.97
10 12.72 14.57
11 13.30 15.34
12 14.81 17.39
13 15.92 18.94
14 16.35 19.55
15 16.84 20.25
16 17.19 20.76
17 17.96 21.89
18 19.33 23.96
19 20.72 26.13
20 21.54 27.45
21 25.50 34.24
22 25.79 34.76
23 26.59 36.21
24 27.11 37.19
25 40.47 67.98
26 48.06 92.54
Range of OP on OR 12.72 to 17.96 14.57 to 21.89
Range of OP on OC (on considering entities having normal profits or losses only i.e. till S. No. 24) 12.26 to 17.19  

13.97 to 20.76

CONCLUSION OF COMPARABLE SEARCH PROCESS

As per the above working the companies operating in the IT or ITeS entities which fall under the above criteria can have the operating profit margins within the range from 12.72% to 17.96% and 14.57% to 21.89% w.r.t. OR and OC, respectively.

From the above results of the comparable search process, it can be observed that if the entities operating in the said sector and satisfying the above criteria the safer OPM can be 15% or more based on OR. However, as the transfer pricing is very much subjective the margin calculation depends on various factors like the transactions entered by the assessee during the year, any additional expenses incurred not in relation to the operating activity carried on by the assessee, actual nature of the operations performed by the assessee entity etc.

Disclaimer: The above Margins Calculated are Illustrative but Cannot be taken as Comparable Entities for Performance of any Transfer Pricing Audit U/s 92E of the Act. This is due to the reason that Comparable Search Process is Subjective W.R.T. The Assessee Entity and that too Every Year or Per Year Basis. Further, All the Information, Contents, Opinions and Resources whatsoever Provided in this Article cannot be Construed as Tendering of Professional Legal Advice, Source of Advertising or Solicitation or Invitation.

The author can be reached at: Mob: +91 9930511578 or via E-mail: [email protected]

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2 Comments

  1. Ravi says:

    Can you please share the Name of selected companies in each filters, in your article titled “Transfer Pricing: Suggested Operating Profit Margins for IT & ITeS Sector” published in TaxGuru on 26.11.2019.

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