The Delhi bench of the Income Tax Appellate Tribunal agreed with the taxpayer that certain comparable companies selected by the Transfer Pricing Officer were to be excluded from the analysis, and further held that the Assessing Officer erred in adding back a transfer pricing adjustment to book profits under section 115JB of the Income-tax Act, 1961.
The case is: Cash Edge India Private Ltd v. ITO [ITA No. 64/Del/2015]
The taxpayer provided software development and business support to its related U.S. entity, and was compensated for this service on a cost-plus basis under the terms of the professional services agreement between the taxpayer and the U.S. entity.
The arm’s length price of the international transaction (software development services) was determined by applying the transactional net margin method (TNMM) and by taking operating-profit-to-total-cost ratio as the profit level indicator. The taxpayer’s profit level indicator was determined at 11.16%—whereas the average profit level indicator for 14 comparable companies selected by the taxpayer was 6.9%.
The Transfer Pricing Officer rejected the taxpayer’s transfer pricing study and, in conducting a “fresh” benchmarking analysis, selected 10 comparables and proposed a transfer pricing adjustment based on a computation of the mean profit level indicator at 23.68% (instead of 11.16% as reported by the taxpayer).
The taxpayer contested the transfer pricing adjustment, disputing the selection of certain comparable companies and also claiming that book profits cannot be adjusted except per Explanation 1 of Section 115JB—and that a transfer pricing adjustment is not listed under this explanation.
The tribunal agreed that certain contested comparables were to be excluded from the set selected by the Transfer Pricing Officer; that foreign exchange gain or loss is to be treated as an operating loss; and that the transfer pricing adjustment could not be added back to book profits of the taxpayer.
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