Transfer Pricing- Supernormal profit making companies should be excluded from the comparable set

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Adobe Systems India Private Limited Vs. ACIT [201 1-TII-13-ITAT-DEL-TP] (Date of Judgement: 21 January 2011; Assessment Year: 2006- 07) held that super normal profit making companies should be excluded from the comparable s set, as they have a tendency to skew the results and cannot be considered as representative of the industry. The Tribunal further commented that the order of the Dispute Resolution Panel (DRP) was very cursory and laconic contrary to the mandate of Section 144C.

Facts of the case

• The taxpayer, a wholly owned subsidiary of Adobe Systems Inc., USA, is engaged in provision of software development services and marketing support services to its associated enterprises, as a contract service provider.

• In the Transfer Pricing Documentation for assessment year (AY) 2006-07, the taxpayer has earned an operating margin (Operating Profit/ Total Cost) of 14.96%. The Transfer Pricing Officer (TPO) rejected the arm’s length analysis of the taxpayer and proceeded to determine the operating margin at 24.9 1% by removing certain com parables selected by the taxpayer and introducing some new com parables.

• Further, the TPO used the updated data for financial year (FY) 2005-06 instead of the weighted average of earlier years as relied upon by the taxpayer.

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