INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPOperating profit margin of assessee was higher than overage operating profit margin of comparable companies--Assessee-company was a subsidiary company fo a USA based non-resident company. Assessee renders customized software development services to associated enterprises and also renders post sales support services. In TP documentation assessee determined ALP of international transactions by applying TNMM as most appropriate method. Assessee had Bench marked its international transaction with 10 comparable companies with an average operating profit ratio of 9.31 per cent. The operating profit (P) margin of assessee was computed at 12.49 per cent. Since OP/TC earned by assessee on ransactions with the AE's at 12.49 per cent was higher than the average operating profit margin earned on similar ransactions with unrelated third parties at 9.31 per cent the international transaction was considered to be at arms length price. TPO in his transfer pricing order has rejected 5 comparable companies identified by assessee and benchmarked the OP/TC per cent of assessee-company by taking into account the four high profit making companies. Average operating profit ratio of four companeis was arrived at 22.10 per cent and passed order under section 92CA(3) by adding back Rs. 14.79 crores on account of difference in the margin of comparable companeis ad assessee-company. Held: . It has been submitted that Zenith Infotech Ltd. has shown abnormal high profit margin. It has been submitted that 'Z' Ltd. company taken into consideration by TPO is predominantly software product company, while the assessee was engaged in rendering software development services. It has been further submitted that software product company ends up earning higher margin as they were engaged in selling of software products owned by them. Thus assessees contention seems correct that when the loss making companies have been taken out from the list of comparables by TPO, 'Z' Ltd. which showed super profits should also be excluded. The fact that assessee has himself included in the list of comparables, initially could not act of estoppel particularly in light of the fact that AO has only chosen the companies which were showing profits and has rejected the other companies which showed loss. Therefore, it was held that when loss making companies have been removed from comparables by TPO, assessee was right in contending that Z Ltd. was should also be removed as it showed super profits. Thus average operating prrfit margin after removing 'Z' Ltd. comes out to 13.01 per cent. Since OP/TC of assessee at 12.49 per cent is within the safe harbour range of ()5 per cent as per the proviso tos ection 92C(2) of OP/TC margin of 3 comparable companies at 13.01 per cent no adjustment was warranted on account of difference in arms length price of international transaction.