IBM INDIA PVT LTD,BANGALORE vs. DCIT, CIRCLE-3(1)(1), BANGALORE

The assessee has raised the following grounds of appeal :-

The assessee has challenged only ground No.2.7 of the appeal where it is claimed that the ld. CIT(A)/AO/TPO erred in not considering the data for 2 years while computing the margins of the comparable company.

The brief facts of the case show that as the assessee filed its return of income at a loss of Rs.61.56 crores on 31.10.2002, the return was picked up for scrutiny and as it has entered into international transaction exceeding Rs.5 crores, reference u/s. 92CA of the Act was made to determine the ALP of the international transaction. The ld. TPO determined the ALP of international transaction at Rs.231,67,29,623 and proposed an adjustment of Rs.35,27,95,703 as per order dated 31.3.2005.

Against this, the assessee preferred appeal before the ld. CIT(A) wherein the ld. CIT(A) set aside the TP adjustment for fresh consideration.

The matter reached the ITAT wherein by order dated 27.4.2010 the order of the ld. CIT(A) was set aside and issue was remanded back to him with a direction to dispose of the appeal on merits. On this basis, the ld. CIT(A) called for a remand report on the TP adjustment where in ld TPO confirmed and supported the TP adjustments.

The functions of the assessee were manufacture of personal computers and distribution of market support. The assessee maintained the segmental accounts and therefore in the TP Study Report the assessee claimed that it is a marketeer of IBM products and therefore distribution segment should be considered as a whole and cannot be artificially segregate in trading of hardware and software . According to the assessee, these are closely linked transactions. The ld. TPO did not consider the explanation of the assessee, segregated manufacturing and distribution segments separately and computed the ALP. However, while computing the ALP, the margins of the comparables were taken for only single year.

The assessee objected before the ld. CIT(A) stating that the ld. TPO should have taken the average of two year and one earlier year. Thus the claim of the assessee is that the single year data could not have been taken, but 3 years data should be taken.

The ld. CIT(A) rejected the above stating that Rule 10B(4) does not allow so. The ld CIT (A) held as under :-

Thus, the only claim of the assessee is that the ld. CIT(A) has not considered the above explanation of the assessee that 3 years data should have been taken and averaged out instead of single year data. The LD AR submitted a chart Wherein it is submitted that the margin of the comparable companies for the current year is 8.32% whereas the margin of the assessee is 5.89% and if this contention is accepted, the adjustment would be either obliterated or substantially reduced.

The learned departmental representative vehemently submitted that the learned CIT – A has rejected the contention of the assessee and there is no infirmity therein.

We have carefully considered the rival contention and perused the order of the learned CIT – A. In this case the learned transfer pricing officer took 7 comparables and worked out the average profit margin by taking the mean of the figures for FY 2000 – 01 and FY 2001 – 02. Accordingly the adjustment was made. The contention of the assessee that he should have taken three years data for working out the difference in the ALP. The learned CIT – A also stated that such data may also be considered if it reveals facts which could have an influence on the determination of transfer prices in relation to the transaction is being compiled. It is for the assessee to show that it is more appropriate in the circumstances to determine the arm's-length price in the manner where the data related to a period not being more than two years prior to such financial year is considered.

In view of the above facts we restore the whole issue back to the file of the learned CIT – A with a direction to the assessee to show that if the computation of margin of the assessee as well as comparable would be proper if three years average data is considered and same would be in accordance with the provisions of rule 10 B of the income tax rules 1962. The chart submitted by the assessee is also required to be perused by the learned CIT – A and then decide the issue afresh. Thus ground No. 2.7 of the appeal is allowed as indicated above.

No other grounds are pressed before us and therefore they are dismissed.