ACIT v. SRA Systems Ltd. (2013) 22 ITR 205(Chennai) (Trib.)

S.92CA: Avoidance of tax-Transfer pricing-Arm's length price-List of comparable companies relied on by

assessee rejected by Transfer Pricing Officer without stating any reason. Factual matrix exactly the same in all

years heldArm's length price adjustment is not justified.

The assessee-company provided computer system consultancy services to private sector, public sector, Government and other organisations, undertaking studies on matters relating to feasibility of computerisation, evaluating and selecting appropriate hardware and software, installing and assisting in using mainframe, mini and microcomputers, etc. For the assessment years 2003-04 and 2004-05, the question of determining the arm's length price of its international  transactions with its associated enterprise was referred to the Transfer Pricing Officer under section 92CA(1) of the Act, The assessee filed a detailed transfer pricing study report in which it had adopted the transactional net margin method as the most appropriate method to arrive at the arm's length price. It had selected a list of 6 comparable companies and had determined arm's length price on the basis of the ratio of operating profit to total cost of the assessee-company worked out at 18.04 per cent., the average profit level indicator of the six companies. The Transfer Pricing Officer approved the transactional net margin method adopted by the assessee-company and agreed with the assessee-company's adoption of the ratio of operating profit to total cost as the profit level indicator. The Transfer Pricing Officer, however, made his list of comparable companies and worked out the ratio of operating profit to total cost at 27.52 per cent. This revised profit level indicator worked out by the Transfer Pricing Officer brought out an operating profit of Rs. 8.73 crores. But

the operating profit returned by the assessee was Rs. 4.15 crores. The Assessing Officer made an addition of Rs.4.58 crores, the differential amount, to the income of the assessee towards arm's length price adjustment. On appeal, the Commissioner (Appeals) deleted the said arm's length price addition of Rs. 4.58 crores and directed the Assessing Officer to allow exemption under section 10A of the Act. The Commissioner (Appeals) also confirmed the disallowance of dividend tax delay charges, interest for delay in remitting tax deducted at source, expenses incurred for delay in UTI dividend payments, and directed the Assessing Officer to allow the claim of expenses towards development of software as allowable business expenditure. On appeals by the Department and cross-objections by the assessee ,the Tribunal held that (i) that the list of comparable companies relied upon by the assessee-company had been rejected by the Transfer Pricing Officer without stating any reason, even though the Transfer Pricing Officer had, by and large, agreed with the general premises on which the assessee had computed its arm's length price. The Transfer Pricing Officer had not made any finding that the price charged or paid in the transactions entered into with the associated enterprise was not in accordance with rules. The Transfer Pricing Officer had no case that the assessee-company had not maintained proper information and documentation relating to the international transactions. There was also no dispute on the information and data used in the computation of arm's length price, which related to the financial year 2002-03. The arbitrary selection of comparables had in fact inflated the operating profit in the computation made by the Transfer Pricing Officer. There was no factual basis for the addition of the differential amount of Rs. 4.58 crores worked out by the Transfer Pricing Officer and adopted by the Assessing Officer. Moreover, for the immediately succeeding assessment

year 2004-05, the Commissioner (Appeals) had held in the assessee's own case that the Transfer Pricing Officer should not have rejected the arm's length price disclosed by the assessee and in the subsequent assessment year 2005-06, the Transfer Pricing Officer himself had accepted the arm's length price returned by the assessee-company. For all these assessment years, the factual matrix of the case remained exactly the same. Therefore, the Commissioner (Appeals) was justified in deleting the arm's length price addition of Rs. 4.58 crores. (A.Y.:2003-2004, 2004-2005)