M/S ACI WORLDWIDE SOKUTIONS PVT. LTD.,,BANGALORE vs. ACIT, BANGALORE

This appeal by the assessee is against the order dated 29.3.2012 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2004-05.

The assessee is a private limited company. It is a 100% subsidiary of an American company. The assessee is engaged in the business of IT(TP)A No.652/Bang/2012 Page 2 of 8 developing software solutions for the banking industry. During the previous year, the assessee had entered into an international transaction with its AE viz., transaction of rendering software development services. The consideration received by the assessee for rendering of such services has to therefore satisfy the ALP of the transaction in question filed an audit report u/s. 92E in Form 3CEB certifying the price charged in the international transaction as at arm’s length.

The method adopted by the assessee company justifying the price charged was the “Cost Plus” method. The said method was adopted as it was engaged in rendering of services over a long duration of time and the guidelines of the OECD issued in this regard recommended the “Cost Plus” method being adopted under such circumstances.

The Transfer Pricing Officer rejected adoption of the “Cost Plus” method on the ground that the workings of the direct and indirect costs of production in case of the assessee and the comparable companies are not clear. The Transfer Pricing Officer has concluded that since correct and complete data of all direct and indirect costs that have gone into cost of production, in the case of comparables are not available, the “Cost Plus” method is to be rejected. Instead, the TPO proposed the adoption of Transaction Net Margin Method (TNMM) and in the process relied on the average percentage of net margin to cost of 12 companies selected as comparables by him. A letter dated 03-11-2006 was sent to the assessee,

The TPO, however, passed an order under section 92CA of the Act on 22-12-2006. The TPO, in his order, adopted the TNMM for determining arm’s length price (ALP). Nine companies were selected as comparables (instead of twelve companies as originally proposed) and average net profit margin to cost of these comparables was calculated at 18.27%. A negative adjustment of 2 was allowed for differences between the assessee and the comparables towards level of working capital and risk level. ALP of the international transaction was accordingly determined at Rs. 5,78,48,120.

Aggrieved by the order of AO, the assessee filed an appeal before the CIT(Appeals). The 9 comparables chosen by the TPO and their arithmetic mean were as follows:-

The assessee sought exclusion of three out of nine comparable companies chosen by the TPO and the CIT(Appeals) accepted the stand of the assessee and excluded the three comparables chosen by the TPO. The CIT(Appeals), on his own, excluded two more comparable companies chosen by the TPO. Out of the 9 comparables, after the order of CIT(A), thus the following 4 companies alone remained as comparables:-

In the appeal before the Tribunal, the assessee has no objection to the order of CIT(Appeals) retaining the aforesaid four companies as comparables. The request of the ld. counsel for the assessee was that the assessee had sought inclusion of the following two companies as comparables before the CIT(A):-

In the impugned order of the CIT(Appeals), the above submissions were not considered by the CIT(Appeals) at all. We are therefore of the view that it would be just and appropriate to direct the TPO/AO to consider the comparability of these two companies. We hold and direct accordingly.

The next request made on behalf of the assessee was that the assessee provided depreciation at a higher rate than what is prescribed under the Income-tax Act, 1961, whereas the comparable cases chosen by the TPO charged depreciation as per the I.T. Act. The details given by the assessee in this regard were as follows:-

The assessee also gave impact of the depreciation rates adopted by the comparable companies by filing two charts which are indexed as Annexure-I & II to this order.

The assessee also relied on the decision of the Hon’ble Tribunal in the case of Egain Communications Pvt. Ltd. v. ITO (2008) TIOL 282, ITAT, Pune, wherein it was held that proper adjustment has to be given where the rates of depreciation adopted by the tested party and the comparable companies are different.

The CIT(Appeals) did not consider the above submissions, but took the following view:-

Before us, the limited request of the ld. counsel for the assessee is to allow proper adjustments on account of rates of depreciation adopted by the comparable companies. In our view, the request of the assessee is proper and deserves to be accepted in the light of the decision of the Pune Bench cited by the ld. counsel for the assessee supra. We accordingly direct the TPO to allow appropriate adjustments while working out the margins of the assessee as well as comparable cases.

All the other grounds raised by the assessee in the grounds of appeal were not pressed.