Saktijit Dey, Member (J) - (1.) THIS appeal by the assessee is directed against assessment order dated 31/12/2013 passed u/s. 143(3) read with section 92CA(3) and 144C(5) of the IT Act in pursuance to direction of the Dispute Resolution Panel (DRP), Hyderabad pertaining to the assessment year 2009 -10.
(2.) BRIEFLY the facts emanating from the materials on record are, assessee, an Indian company incorporated on 20/08/2007, is a wholly owned subsidiary of ISP Group having its headquarters in Wayne, New Jersey, USA. The ISP Group is engaged in developing, manufacturing and supplying innovative specialty ingredients that enhance product performance. Assessee on its part provides application support, analytical support, R&D services to its AEs. The business activity of the assessee is basically in three segments. The research and development services division is engaged in providing research and development services to its group companies. For this purpose, assessee has set up a R&D centre at Somajiguda, Hyderabad. The corporate support services division is engaged in providing corporate support services (BPO services) to its group companies. Though, apart from these two divisions assessee also has a trading division, since no sales has been effected during the year, it has no relevance for the year under consideration. For the AY under consideration, assessee filed its Return of Income on 30/09/2009 declaring loss of Rs. 32,79,605. Subsequently, a revised return was filed declaring loss of Rs. 45,14,288. During the scrutiny assessment proceeding, AO noticed that assessee has entered into international transactions with its Associated Enterprises (AEs) as under: As the revenue earned by assessee from the international transactions with the AEs was more than Rs. 15 crores, AO made a reference u/s. 92CA(1) to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP). In course of proceeding before TPO, assessee submitted a TP study report carried out through an external agency. In the TP analysis, both for corporate support services segment as well as R&D segment, assessee was chosen as the tested party and Transaction Net Margin Method (TNMM) was adopted as the most appropriate method with operating profit to operating cost (OP/OC) as profit level indicator (PLI). In corporate support services segment seven companies with arithmetic mean (OP/OC) of 14.50% were selected as comparables. Assessee's OP/OC being 10%, the price charged to AE was considered to be within arm's length. Similarly, for R&D services segment assessee selected two companies with average OP/OC of 10.08% as comparables. Assessee's OP/OC being 10%, price changed to AE was considered to be within arm's length.
(3.) THE TPO though accepted TNMM as the most appropriate method with OP/OC as the PLI for both the segments i.e. corporate support services and R&D, but, after analyzing the TP study report as well as reply given by assessee to the queries made by him, was of the opinion that out of the seven comparables selected by assessee in corporate support services segment two companies, namely, CG Vak Software and Export Ltd. and CEPHA Imaging Pvt. Ltd. are not comparable to assessee. Accordingly, TPO out of the seven comparables selected by assessee retained five while rejecting the aforesaid two companies. The arithmetic mean of the five companies retained by TPO being 28.58% as against OP/OC of 10% shown by assessee, the ALP was determined at Rs. 4,78,98,219. ALP shown by assessee being 4,09,76,856, the short fall of Rs. 69,21,363 was treated as transfer pricing adjustment to be made to the ALP. As far as Research & Development support services segment is concerned, TPO, though, accepted the two companies selected by assessee as comparables, but, he nevertheless selected two more companies as comparables in addition to the two companies selected by assessee. The two companies selected by TPO are Celestial Biolabs Ltd., and TCG Lifescience Ltd. The arithmetic mean of the four comparables selected by TPO being 32.4%, the ALP was determined at Rs. 8,32,46,264 as against Rs. 6,91,62,304 shown by assessee. The resultant shortfall of Rs. 1,40,83,960 was recommended for addition towards TP adjustment to the ALP. Thus, the total addition recommended by the TPO under both the segments was to the tune of Rs. 2,10,05,323. TPO also did not allow any deduction on account of risk/working capital adjustment. In pursuance to the order passed by TPO, AO proposed a draft assessment by incorporating the additions recommended by TPO on account of TP adjustment. Assessee objected to the draft assessment order before the DRP.;