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Transfer Pricing: Super-normal profit cos must be excluded from comparables. DRP must not pass cursory / laconic orders
The assessee, engaged in providing software development services reported an OP/Cost Margin of 14.96%. The TPO worked out the average of arithmetic mean of ALP (OP/OC) of 42 comparables at 24.91% and directed that an adjustment of Rs. 10.40 crores be made. In its objections to the DRP, the assessee claimed that the comparables included three companies which were “super-normal profit making” and that these should be excluded. It was claimed that if the said companies were excluded, the arithmetic mean of OP/OC of the comparables was 17.15% which was within the +/- 5% range permitted by s.92(C)(2). The TPO rejected the contention on the ground that one company was listed and audited and showing consistent growth at the same level and there was no abnormality and that the other company’s information was not listed in the database. The third “abnormal” company was not dealt with by the TPO. The DRP dismissed the objections of the assessee by a “very cursory and laconic order”. On appeal by the assessee, HELD allowing the appeal:
(i) The TPO rejected the assessee’s contention with regard to inclusion of the three super-normal profit companies without any cogent reason. It is undisputed that the three companies have shown super-normal profits as compared to other comparables. Their exclusion from the list of comparable is quite correct. After excluding the three companies the arithmetic mean of the comparables falls within the +-5% range permitted by s.92(C)(2);
(ii) Despite the voluminous submissions and paper book filed, the DRP passed a very cursory & laconic order without going into the details of the submissions which is quite contrary to the mandate of s. 144C.
Note: Unlike other matters of “cursory & laconic” DRP orders where the matter was remanded to the DRP (e.g.
GAP &
Vodafone), here the assessee’s appeal was allowed
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