Filter of extraordinary event in transfer pricing analysis
20 June, 2014
Even while being largely factual, transfer pricing cases make an interesting read and bring out new arguments. In Ness Innovative Business Services P. Ltd v. DCIT, decided on 18-6-2014, ITAT, Hyderabad examined a few such arguments in ruling out comparables included by the Transfer Pricing Officer (TPO). The assessee was engaged in business of software development services, did not object to 9 comparables out of the 16 selected by the TPO but raised objections to the others.
Functionally different entities
It was contended successfully that e-paper solutions, data cleansing software, software products and ITES company were different from the assessee. Certain comparables were also involved in help desk services for ERP software. The assessee described itself as a ‘contract captive service provider’.
The assessee contended that amalgamation of one of the comparables with another resulted in exceptional increased income for the year. The entity could not furnish separate accounts and its operating margin was high due to the difference between expense it intended to incur and what was actually incurred. Inclusion of the same entity had been under challenge in an earlier case, which was later remanded. However, in the present case the tribunal held that since the assessee had objected before the AO itself, the entity can be removed from list of comparables. Interestingly, the argument of extraordinary event was taken in the case of Google India P ltd v. DCIT, ITA1368/ 2010, Bangalore, but was not successful. The Bangalore Tribunal had opined that it was not established as to how extraordinary event like IPO or fluctuations in the market affected the operating margin. Also, it held that such comparables may be used after suitable adjustments.
Payment of VAT is not proof of sale of software
Seeking to include a certain comparable the assessee contended that the TPO should not reject the comparable on the ground that the entity was engaged in sale of software, only because VAT was paid. However, the tribunal did not take up this issue holding that even without including the comparable, the ALP was proved on the basis of comparables selected by the TPO and others which were held to be suitable.
Thus, also according weight to the other objections like rejection of the comparable in a subsequent year and premium pricing for products commanded by a market leader, the tribunal thus ordered the TPO to rework the ALP and modify the order accordingly.