Income Tax Appellate Tribunal Bangalore Dcit, vs M/S Electronics For Imaging India Pvt. ... on 10 March, 2017 IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, BENGALURU BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT(TP)A No.462/Bang/2013 (Assessment year: 200506) Deputy Commissioner of Incometax, Circle 11(3), Bengaluru. ... Appellant Vs M/s.Electronics for Imaging India Pvt. Ltd. Kalyani Platina, 4th floor, BlockI, 24, EPIP Zone, PhaseII, Whitefield, Bengaluru560066 ... Respondent PAN:AAACG 6053E AND CO No.149/Bang/2015 (In IT(TP)A No.462/Bang/2015) (Assessment year: 200510) (By the assessee) Revenue by : Smt. Swapna Das, JCIT. Assessee by : Shri Padamachand Khincha, CA. Date of hearing : 14/12/2016 Date of pronouncement : 10/03/2017 O R D E R Per INTURI RAMA RAO, AM : This is an appeal is filed by the revenue and the cross objections by the assessee directed against the order of the CIT(A)IV, Bengaluru, dated 23/01/2013 for the assessment year 200506. IT(TP)A No.462/B/2013 & CO 149/B/2015 Page 2 of 25 2. Briefly facts of the case are as under: The assessee is a company duly incorporated under the provisions of the Companies Act, 1956. This is wholly owned subsidiary of M/s.Electronics for Imaging Inc.(EFI group), USA. It is engaged in the business of software development and marketing support services to Associated Enterprises (AEs). 3. Return of income for the assessment year 200506 was filed on 25/10/2005 declaring total income of Rs.14,27,123/. The assesseecompany also reported the following international transactions with its Associated Enterprises (AE): Ø Provision for Software development and related services Rs.12,74,70,626/ Ø Interest paid Rs.1,42,784/ The assesseecompany sought to justify the consideration received for international transactions with its AEs to be at arm's length price. The assesseecompany also submitted transfer pricing study report adopting gross profit margin by cost as the profit level indicator for the transfer pricing (TP) study. The assesseecompany applied CPM method i.e. cost plus method which was considered to be most appropriate method for the purpose of bench marking its international transactions. The assesseecompany's profit margin was computed at 39.5% and the assesseecompany claimed that he same was comparable with other companies rendering or engaged in similar business. For the purpose of transfer pricing (TP) study assesseecompany IT(TP)A No.462/B/2013 & CO 149/B/2015 Page 3 of 25 had chosen 12 comparable entities and the arithmetical average of operating margin of said comparables was computed at 23.11%. According to the assesseecompany, its PLI was much higher than the original arithmetical mean of the comparable entities. Hence, it was claimed that the transactions with its AEs are at arm's length. The assesseecompany also chose the following 12 entities as comparables whose average profit margin was computed at 23.11%: 4. The Assessing Officer [AO] referred the matter to the Transfer Pricing Officer [TPO] for the purpose of bench marking its international transactions with its AEs. The TPO, by order dated 31/10/2008 passed u/s 92CA òf the Act, computed TP adjustment of Rs.1,79,31,851/. The TPO rejected the TP study report submitted by the assesseecompany and also rejected the CPM method and adopted TNMM as the most appropriate method IT(TP)A No.462/B/2013 & CO 149/B/2015 Page 4 of 25 and adopted the operating profit by operating cost as profit level indicator [PLI]. Then the TPO proceeded to identify a different set of comparable entities for the purpose of determining the Arm's length price (ALP). While doing so, the TPO applied the following filters: The TPO finally selected the following comparables: The TPO computed average profit margin of the comparable finally selected by him at 26.59%. After giving working capital IT(TP)A No.462/B/2013 & CO 149/B/2015 Page 5 of 25 adjustment of 1.69% adjusted arithmetical mean PLI was determined at 24.9%. On the above basis, the TPO computed TP adjustment as follows: 5. After receipt of the TPO's order, the AO passed the assessme