S. 92CA


ADAPTEC (INDIA) PVT LTD v ACIT (ITA No.1758/Hyd/2012 dated 21/03/2014) – Hyderabad ITAT Background: The asseseee is engaged in the business of software design, development and testing in the areas of high performance storage solutions. The assessee renders software development services to its Associated Enterprise (AE) i.,e., Adaptec Inc, USA. The assessee is registered as 100% EOU under the STPI Scheme.  The assessee being a captive service provider to its AE is remunerated on a cost plus mark up basis for the services provided. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as comparables with weighted average arithmetic mean of 14.53%. As the assessee’s net margin from the provision of services to AE at 14.03% was within the arm’s length, no adjustment was made in the TP study.  The TPO, though accepted TNMM as the most appropriate method and the PLIOP/OC, he nevertheless rejected the TP study of the assessee by observing that multiple year data was considered while selecting comparables and companies engaged in software development have been treated as comparables irrespective of the verticals/horizontals of software services which has made the comparability analysis defective and unreliable.  TPO also applied certain additional filters, one of them being companies having turnover of less than 1 crore were rejected. The TPO finally selected 19 companies as comparables with average margin of 26.20% and after allowing working capital adjustments of 3.58% arrived at the adjusted arithmetic mean PLI of 22.62% and determined the ALP at Rs.19,48,41,447. The TPO treated the shortfall of Rs.1,82,73,532/- as the transfer pricing adjustments u/s 92CA of the Act.

Companies with turnover less than 1 crore and abnormally high turnover to be excluded from ...