Asstt. CIT v. Ckar Systems (P.) Ltd.

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The Tax PublishersITA No. 565/Hyd/2011 2013 TaxPub(DT) 0215 (Hyd-Trib) : (2013) 055 SOT 0553 : (2012) 020 ITR (Trib) 0817 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Adoption of comparable uncontrolled price method (CUP)--Assessee adopted comparable uncontrolled price method for computing the ALP for the international transactions entered into by it with its associate enterprises for medical transcription services rendered by it to the associate enterprises. In this regard, assessee considered two external comparables and three internal comparables. The TPO held that the ALP computed by the assessee could not be accepted. For determining ALP, the TPO selected 9 comparable companies and on the basis of the profit margin of six of these companies, determined the average profit margin, i.e., arithmetic mean profit level indicator (PLI) at 24.65 per cent after allowing deduction of 1.59 per cent towards working capital adjustment, he determined the arithmetic mean profit level indicator at 23.06 per cent and on that basis, he determined the ALP. The ALP computed by TPO exceeded by Rs. 1,70,51,255 of assessee's computation of ALP. The assessing officer, thus, passed order accordingly. The Commissioner (Appeals) allowed assessee's method and allowed assessee's appeal. *Held:* The CUP was the most appropriate method for computing the ALP for international transactions entered into by the assessee with its associate enterprises. No addition could be made. As can be seen from the order of the Transfer Pricing Officer, though the Transfer Pricing Officer accepts the fact that comparable uncontrolled price method is the most direct and reliable one to apply for determining arm's length price, he rejects the comparable uncontrolled price method adopted by the assessee in the present case on the 'ground that in the absence of information, the assessee's statement that in medical transcription industry, in general, the price charged per line of transcription of around 00.6 US$ cannot be accepted and that apart,, no publicly available information on prices charged in independent transactions of similar and identical nature that reflect the characteristics of the services rendered by the assessee, has been furnished. 'Therefore the comparable for applying the comparable uncontrolled price method cannot be accepted. The Transfer Pricing Officer has further observed that the assessee also accepts that the transactional net margin method is a useful method for computing the arm's length prices in its case. However, such finding of the Transfer Pricing Officer is not correct. It is seen from the order of the, Transfer Pricing Officer itself that in response to his show-cause notice dated 22-10-2008, the assessee has strongly objected to the proposal for applying the transactional net margin method and has requested, for accepting the comparable uncontrolled price method applied by the assessee. The assessee has submitted before the Transfer Pricing Officer that it has applied the comparable uncontrolled price method after comparing the functions performed and the risks undertaken by each entity involved in the inter-company transactions. The Transfer Pricing Officer has brushed aside the objections of the assessee by simply observing that the assessee has not provided quantitative details with reference to the unrelated comparables. However, such finding of the Transfer Pricing Officer is again not correct, considering the fact that the assessee has furnished all the relevant information/data, requisitioned by the Transfer Pricing Officer from time to time. This fact is very much evident from paragraph 1.1 of the order of the Transfer Pricing Officer itself. Therefore, the finding of the Transfer Pricing Officer that the assessee has not given the quantitative details is without any basis. It is a matter of fact that the assessee has submitted the agreements between the assessee and its associated enterprise as well as the agreements entered into by the associated enterprise with the other Indian companies and the agreements between the assessee and its other overseas customers. The assessee has also submitted bills raised and the prices charged for each line of medical transcription work by the assessee to its associated enterprise and by the Indian companies for the services rendered to CBay Systems, USA and also the services rendered by the assessee to the overseas customers. On perusing services rendered and price charged for all the aforesaid transactions, it is seen that the price charged by the assessee to its associated enterprise on each line of medical transcription work at 0.063 US$ is almost equal to the similar rate charged per line on medical transcription work by the other uncontrolled parties, considered as comparable by the assessee. The observation of the Transfer Pricing Officer that the comparables cannot be considered to be uncontrolled is without any basis, and it is based on mere presumptions and surmises. When the comparables considered by the assessee are in no way connected either with the assessee or with its holding company, and all the information/data relating to their transactions are available, the Transfer Pricing Officer was not justified in rejecting the computation of the arm's length price made by the assessee by applying the comparable uncontrolled price method. The Commissioner (Appeals) has passed a well reasoned order, elaborately discussing the various issues raised by the Transfer Pricing Officer and ultimately coming to a conclusion that the comparable uncontrolled price method is the most appropriate method for computing the arm's length price for the international transactions entered into by the assessee with its associated enterprise. Tribunal fully agrees with the order of the Commissioner (Appeals) in this behalf. SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 565/Hyd/2011
2013 TaxPub(DT) 0215 (Hyd-Trib) : (2013) 055 SOT 0553 : (2012) 020 ITR (Trib) 0817

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Adoption of comparable uncontrolled price method (CUP)--Assessee adopted comparable uncontrolled price method for computing the ALP for the international transactions entered into by it with its associate enterprises for medical transcription services rendered by it to the associate enterprises. In this regard, assessee considered two external comparables and three internal comparables. The TPO held that the ALP computed by the assessee could not be accepted. For determining ALP, the TPO selected 9 comparable companies and on the basis of the profit margin of six of these companies, determined the average profit margin, i.e., arithmetic mean profit level indicator (PLI) at 24.65 per cent after allowing deduction of 1.59 per cent towards working capital adjustment, he determined the arithmetic mean profit level indicator at 23.06 per cent and on that basis, he determined the ALP. The ALP computed by TPO exceeded by Rs. 1,70,51,255 of assessee's computation of ALP. The assessing officer, thus, passed order accordingly. The Commissioner (Appeals) allowed assessee's method and allowed assessee's appeal. Held: The CUP was the most appropriate method for computing the ALP for international transactions entered into by the assessee with its associate enterprises. No addition could be made.

As can be seen from the order of the Transfer Pricing Officer, though the Transfer Pricing Officer accepts the fact that comparable uncontrolled price method is the most direct and reliable one to apply for determining arm's length price, he rejects the comparable uncontrolled price method adopted by the assessee in the present case on the 'ground that in the absence of information, the assessee's statement that in medical transcription industry, in general, the price charged per line of transcription of around 00.6 US$ cannot be accepted and that apart,, no publicly available information on prices charged in independent transactions of similar and identical nature that reflect the characteristics of the services rendered by the assessee, has been furnished. 'Therefore the comparable for applying the comparable uncontrolled price method cannot be accepted. The Transfer Pricing Officer has further observed that the assessee also accepts that the transactional net margin method is a useful method for computing the arm's length prices in its case. However, such finding of the Transfer Pricing Officer is not correct. It is seen from the order of the, Transfer Pricing Officer itself that in response to his show-cause notice dated 22-10-2008, the assessee has strongly objected to the proposal for applying the transactional net margin method and has requested, for accepting the comparable uncontrolled price method applied by the assessee. The assessee has submitted before the Transfer Pricing Officer that it has applied the comparable uncontrolled price method after comparing the functions performed and the risks undertaken by each entity involved in the inter-company transactions. The Transfer Pricing Officer has brushed aside the objections of the assessee by simply observing that the assessee has not provided quantitative details with reference to the unrelated comparables. However, such finding of the Transfer Pricing Officer is again not correct, considering the fact that the assessee has furnished all the relevant information/data, requisitioned by the Transfer Pricing Officer from time to time. This fact is very much evident from paragraph 1.1 of the order of the Transfer Pricing Officer itself. Therefore, the finding of the Transfer Pricing Officer that the assessee has not given the quantitative details is without any basis. It is a matter of fact that the assessee has submitted the agreements between the assessee and its associated enterprise as well as the agreements entered into by the associated enterprise with the other Indian companies and the agreements between the assessee and its other overseas customers. The assessee has also submitted bills raised and the prices charged for each line of medical transcription work by the assessee to its associated enterprise and by the Indian companies for the services rendered to CBay Systems, USA and also the services rendered by the assessee to the overseas customers. On perusing services rendered and price charged for all the aforesaid transactions, it is seen that the price charged by the assessee to its associated enterprise on each line of medical transcription work at 0.063 US$ is almost equal to the similar rate charged per line on medical transcription work by the other uncontrolled parties, considered as comparable by the assessee. The observation of the Transfer Pricing Officer that the comparables cannot be considered to be uncontrolled is without any basis, and it is based on mere presumptions and surmises. When the comparables considered by the assessee are in no way connected either with the assessee or with its holding company, and all the information/data relating to their transactions are available, the Transfer Pricing Officer was not justified in rejecting the computation of the arm's length price made by the assessee by applying the comparable uncontrolled price method. The Commissioner (Appeals) has passed a well reasoned order, elaborately discussing the various issues raised by the Transfer Pricing Officer and ultimately coming to a conclusion that the comparable uncontrolled price method is the most appropriate method for computing the arm's length price for the international transactions entered into by the assessee with its associated enterprise. Tribunal fully agrees with the order of the Commissioner (Appeals) in this behalf.