The case is: Amdocs Business Services Pvt. Ltd. v. DCIT (ITA No. 1412/PN/2011 (AY 2007-08)
The taxpayer, a wholly owned subsidiary of a Cypriot entity, provided information technology-enabled services to its parent company.
For Assessment Year (AY) 2007-08—the first year of operation— the taxpayer filed an income tax return declaring a loss of INR 56.6 million.
During AY 2007-08, the taxpayer entered into transactions with its related party. The taxpayer benchmarked these international transactions using the Transaction Net Margin Method (TNMM) as the most appropriate method, and selected 12 comparables. With certain economic adjustments made by the taxpayer in its transfer pricing study report, it was claimed that the international transactions were at arm’s length price.
However, the Transfer Pricing Officer (1) considered the data for the year at issue (instead of multiple-year data of the comparable companies); (2) rejected one of the comparables; and (3) disallowed the benefit of the +/- 5% tolerance margin (a benefit allowed when the difference between the transaction price and the arithmetic mean of comparable uncontrolled prices is more than 5%) to arrive at a transfer pricing adjustment of INR 92.2 million (based on a profit-level indicator for the taxpayer of - 30.5% compared to the profit-level indicator of the comparables of 15.57%).
The transfer pricing adjustment was upheld by the Dispute Resolution Panel and accepted by the Assessing Officer.
The tribunal found that a start-up company cannot be compared with established entities in the market and that an adjustment for the difference in capacity utilization was warranted.
The tribunal directed the Assessing Officer to:
- Allow the taxpayer’s claim for a depreciation adjustment and reiterated the importance of economic adjustments in eliminating material differences between the taxpayer and the comparables and to enhance the comparability by allowing adjustments for excess depreciation claimed by the taxpayer
- Allow appropriate economic adjustments, given that the taxpayer was a start-up company and that the comparables selected were well established
- Allow the +/- 5% benefit in computing the arm’s length price because statutory amendments limiting this benefit were not enacted until AY 2009-10
- Reject the taxpayer’s claim to use multiple year data
Read an August 2012 report [PDF 226 KB] on the case, prepared by the KPMG member firm in India: The object and purpose of transfer pricing is to compare like with the like and to eliminate differences by suitable economic adjustments