INCOME TAX ACT, 1961

--Transfer price--Computation of ALP Selection of comparable companies vis-a-vis benefit of section 92C, proviso--Assessee-company was affiliated to 'G' USA. Assessee was engaged in business of provision of software development services. Assessee-company entered into international transaction with its AEs. Assessee was opted most suitable TNNM method and since OP/OC was 14.38% was higher than 11.70% of comparable companies, international transactions were considered to be at arm's length and no adjustment was required to be made, TPO though accepted TNMM but rejected OP/OC (1%) less (-) 40% and greater than 40% considered in search powers and included 3 companies in final set of comparables. TPO accordingly bench marked operating profit margin (OP/OC %) of assessee-company with margin of remaining eight comparable companies TPO in order passed under section 92CA(3) had computed an adjustment of Rs. 78,794,571 on account of difference in margin of comparable companies and the appellant company, DRP upheld order of TPO. Held :Not justified. There were four comparable companies having related party transactions from 44.86% to 118.04% as considered by TPO would be rejected and out of remaining four companies (OP/OC) was worked out to 14.92% which was eligible for proviso to s. 92C and thus as such adjustment proposed by TPO was not justified, as assessee transactions with AE were at arm's length.

Tribunal is agree with the contention of the assessee that an unrelated enterprise having controlled transaction cannot be considered as comparable to the assessee while applying TNMM. As a company having substantiated related party transaction, may influence the profits of the company. In this regard, we can gainfully refer to the 10B(1)(e) of the Income-tax Rules. [Para 5.15] A reading of the this rule 10B(1)(e) clearly shows that under the said Rules the net margin of the assessee required to be compared to an unrelated enterprise from a comparable uncontrolled transaction. Thus it follows that comparables having high ratio of related party transaction cannot be taken a comparable. [Para 5.16] In the background of the aforesaid discussion and precedents, an enterprise is to be considered as uncontrolled for the purpose of benchmarking analysis of the ratio of related party transaction to the relevant base i.e. sales or cost does not exceed the limit of 25%. The related party transaction referred here are those which have a bearing on the net profit of the enterprise.[Para 5.17] Thus, Tribunal is agree with the assessees submission that four companies considered by the TPO in his order, having significant related party transaction should be rejected from the final set of comparables.[Para 5.18] After exclusion of the above companies the operating profit margin (OP/ OC) of the remaining companies works out to 14.92 %. [Para 5.19] From the above, since the operating profit margin (OP/OC%) of the assessee at 14.36% is within the safe harbor range of 5% of the average of (OP/OC) of comparable companies at 14.92% the international transaction undertaken by the assessee should be considered at arms length, and the adjustment proposed by the TPO is unwarranted.[Para 5.20]