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.

Being aggrieved by the said transfer pricing order, the Taxpayer filed its objections along with Form 35 A before the Dispute Resolution Panel (DRP). The DRP confirmed the adjustment and Assessing Officer (AO) passed the consequential order.

Aggrieved by the order of DRP, the Taxpayer preferred appeals before the Tribunal.

Ruling of the Tribunal

The salient aspects of the Tribunals 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 Taxpayers main objection was with regards to the use of financial information of the comparables at the time of assessment by the TPO. However the same information was not available with the Taxpayer when TP study was done by the Taxpayer. The Tribunal rejected the contention of the Taxpayer and held that the latest years 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. 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 TPO may determine the ALP after taking into account all relevant materials which he has gathered. Thus Tribunal held that there is nothing wrong in using updated data when the correctness and relevance of the same is not objected. 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. The Tribunal rejected the Taxpayers 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. The earlier years data can be used only when the data of earlier years reveal facts which can influence determination of transfer price. 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, there is no error or illegality in considering a single/current year data. 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 Taxpayer argued that the operating margin of comparable companies assuming higher business risk is not comparable with the Taxpayers captive risk mitigated operating margin unless an adjustment for functional and risk profile is carried out. 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 Arms Length Price (ALP). Accordingly, the Tr ibunal held that the functional/risk adjustments are not a general rule. 2

 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. Woodward Governor India P Ltd (SC, 312 ITR 254) and Tecnimont ICB Pvt. Ltd. vs. 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.e. 1.10.2009.Hence the +/-5% variation should apply under the old provisions before amendment under Finance Act 2009. Accordingly the Taxpayer can avail the marginal benefit of 5% under proviso to sec 92C(2).

Conclusion
The ruling is significant since it deals with many contentious transfer pricing issues routinely faced by Taxpayers. The ruling upholds that the updated data for a single year i.e. financial year, in which transaction was entered into, can be considered by the TPO even if the same was not available to the Taxpayer at the time of preparation of TP study. Further an important aspect on which the Tribunal ruled relates to functional /risk adjustments.The Tribunal further upheld that the Taxpayer needs to quantify the effects of functional/risk differences etc. Unless the Taxpayer brings on records the effect of functional and risk differences, the same would not be granted as a general rule of standard. The ruling highlights the need for preparation of robust TP Study in order to defend the company before higher tax authorities.

Source: Symantec Software Solutions Private Limited v. Asst. Commissioner of Income Tax (Mumbai Bench), ITA No: 7894/Mum/2010

Contacts
Mumbai 264-265, Vaswani
Chambers, Dr. Annie Besant Road, Worli, Mumbai 400 030. Tel: + 91 (022) 6619 8600 Fax: + 91 (022) 6619 8401 Kolkata Bengal Intelligent Park Building, Alpha, 1st floor, Plot No A2, M2 & N2, Block EP & GP Sector V, Salt Lake Electronics Complex, Kolkata - 700 091. Tel : + 91 (033) 6612 1000 Fax : + 91 (033) 6612 1001 Bangalore Deloitte Centre, Anchorage II, 100/2, Richmond Road, Bangalore 560 025. Tel: +91 (080) 6627 6000 Fax: +91 (080) 6627 6409 Delhi/Gurgaon Building 10, Tower B, 7th Floor, DLF Cyber City, Gurgaon 122 002 Tel : +91 (0124) 679 2000 Fax : + 91 (0124) 679 2012 Chennai No.52, Venkatanarayana Road, 7th Floor, ASV N Ramana Tower, T-Nagar, Chennai 600 017. Tel: +91 (044) 6688 5000 Fax: +91 (044) 6688 5019

Ahmedabad Heritage 3rd Floor, Near Gujarat Vidyapith, Off Ashram Road, Ahmedabad 380 014. Tel: + 91 (079) 2758 2542 Fax: + 91 (079) 2758 2551

Hyderabad 1-8-384 & 385, 3rd Floor, Gowra Grand S.P.Road, Begumpet, Secunderabad 500 003. Tel: +91 (040) 4031 2600 Fax:+91 (040) 4031 2714

Vadodara Chandralok, 31, Nutan Bharat Society, Alkapuri, Vadodara 390 007 Tel: + 91 (0265) 233 3776 Fax: +91 (0265) 233 9729

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