India Tax & Regulatory

Transfer Pricing Alert
Volume: TP/21/2011 9 June 2011

In this issue:

Executive summary Facts Ruling of the Tribunal Conclusion Contacts

The Tribunal rules on various contentious issues such as function/risk adjustment, use of contemporaneous and multiple year data, applicability of +/-5% variation.

Executive summary
The Mumbai bench of the Income Tax Appellate Tribunal (Tribunal) recently pronounced its ruling in the case of Symantec Software Solutions Private Limited, Mumbai (Taxpayer), on transfer pricing issues arising from provision of marketing support and consulting services by the Taxpayer to its Associated enterprise (AE). The Tribunal ruled in the favour of the Revenue for all issues except one issue which was decided in the favour of the Taxpayer.

Facts
The Taxpayer is engaged in the business of providing technical, marketing, pre-sale and after sales support of Veritas group products in India. During AY 2006-07, the Taxpayer has provided marketing support and consultancy services to its AE. The Taxpayer benchmarked the international transaction using Transactional Net Margin Method (TNMM) method and made a self-adjustment of ` 92,15,556 in the return of income. The Transfer Pricing Officer (TPO) updated the margins of 12 comparables selected by the Taxpayer for a single year (FY 2005-06) and arrived at a margin of 29.55% as against the margin of 9.17% as computed by the Taxpayer using data for 3 financial years. Accordingly the TPO calculated the transfer pricing adjustment of ` 2,54,27,043.

1

Ruling of the Tribunal The salient aspects of the Tribunal’s order on the key grounds of appeal filed by the Taxpayer are as follows :  Use of financial information available at the time of assessment by the TPO The Taxpayer’s main objection was with regards to the use of financial information of the comparables at the time of assessment by the TPO. The earlier year’s data can be used only when the data of earlier years reveal facts which can influence determination of transfer price. Thus Tribunal held that there is nothing wrong in using updated data when the correctness and relevance of the same is not objected. The DRP confirmed the adjustment and Assessing Officer (AO) passed the consequential order. As the Taxpayer has not made out a case that taking the data for current financial year does not present the correct and fair financial result of the comparables. The Taxpayer argued that the operating margin of comparable companies assuming higher business risk is not comparable with the Taxpayer’s captive risk mitigated operating margin unless an adjustment for functional and risk profile is carried out. the Taxpayer filed its objections along with Form 35 A before the Dispute Resolution Panel (DRP). The TPO may determine the ALP after taking into account all relevant materials which he has gathered.  Non consideration of Functional and risk level adjustment The Taxpayer objected that the TPO did not make any adjustments for difference in functional and risk profile of the comparables. the Tr ibunal held that the functional/risk adjustments are not a general rule. Aggrieved by the order of DRP.  Use of multiple year data The Taxpayer objected against the use of a single year/current year data instead of three years as taken by the Taxpayer.Being aggrieved by the said transfer pricing order. The Tribunal rejected the Taxpayer’s claim with respect to applicability of proviso to sub Rule 4 of Rule 10B stating that it is not always mandatory to consider financial data for two more years of comparables. However the same information was not available with the Taxpayer when TP study was done by the Taxpayer. there is no error or illegality in considering a single/current year data. The Tribunal ruled in favor of the department stating that the Taxpayer itself has not made any adjustments while preparing the TP study. Further the Tribunal observed that the Taxpayer has not brought forward on record of how such differences has influenced the result of comparables with quantified data to the satisfaction of tax authorities. The Tribunal further added that there are no perfect comparables in terms of functions and risks and hence the legislature has provided a margin of +/-5% while determining the Arm’s Length Price (ALP). the Taxpayer preferred appeals before the Tribunal. Further the Tribunal ruled that the information for the latest financial year is relevant and Sec 92CA(3) empowers the TPO to consider such evidence as he may require on any specific point. The Tribunal rejected the contention of the Taxpayer and held that the latest year’s financial data of comparables very much existed even though the Taxpayer might have no access to the said information at the time of the preparation of TP study. 2 . Accordingly.

e. 1. ITA No: 7894/Mum/2010 3 . Ltd.10. Applicability of +/-5% variation from arithmetic mean of ALP before amendment by Finance Act 2009 The Tribunal decided the issue in the favour of the Taxpayer by referring to the cases of CIT vs. can be considered by the TPO even if the same was not available to the Taxpayer at the time of preparation of TP study. 312 ITR 254) and Tecnimont ICB Pvt. Source: Symantec Software Solutions Private Limited v.The Tribunal further upheld that the Taxpayer needs to quantify the effects of functional/risk differences etc.Hence the +/-5% variation should apply under the old provisions before amendment under Finance Act 2009.e. ACIT (ITAT) and concluded that the amendment in the second proviso to sec 92C(iii) is prospective from the day from which the amendment is effected i. the same would not be granted as a general rule of standard. Further an important aspect on which the Tribunal ruled relates to functional /risk adjustments.2009. financial year. Commissioner of Income Tax (Mumbai Bench). Accordingly the Taxpayer can avail the marginal benefit of 5% under proviso to sec 92C(2). The ruling upholds that the updated data for a single year i. in which transaction was entered into. Unless the Taxpayer brings on records the effect of functional and risk differences. Asst. The ruling highlights the need for preparation of robust TP Study in order to defend the company before higher tax authorities. Woodward Governor India P Ltd (SC. vs. Conclusion The ruling is significant since it deals with many contentious transfer pricing issues routinely faced by Taxpayers.

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