Symantec software Solutions Pvt Ltd vs. ACIT (ITAT Mumbai)

Transfer Pricing principles on use of multi-year data, turnover filter, risk adjustment & +/- 5% adjustment

The assessee’s appeal raised the issues whether (i) the TPO could consider financial information of comparables not available at the time of TP study, (ii) multi-year data of comparables could be considered, (iii) a turnover filter had to be applied for identification of comparable companies, (iv) an adjustment for difference in functional and risk profile of comparable companies vis-à-vis of the assessee had to be made and (v) the amendment of +/-5% variation law was retrospective. HELD by the Tribunal:

(i) The burden of proving that the transactions with the AE is at arms’ length is on the assessee. If the Transactional Net Margin Method (“TNMM”) is adopted, the comparison has to be made between the net margin realised from the operation of the uncontrolled parties’ transaction and net margin derived by the assessee on similar international transactions. The comparison should be between the net margins on transaction basis and not at enterprise level;

(ii) U/s 92CA(3), the TPO is entitled to consider material in public domain which, though not available to the assessee at the time of the TP study, is relevant for the financial year;

(iii) Ordinarily only the data pertaining to the financial year of the transaction can be considered. The proviso to Rule 10B (4) which permits the use of data relating to other than the financial year in which the international transaction has been entered into; being not more than two years prior to such financial year does not mean that one can insist on the use of multi-year data but it has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. As the assessee has not made out a case that taking the data for only the current financial year will not present the correct and fair financial result of the comparables, the claim for multi-year data cannot be entertained;

(iv) While in principle, comparables having an abnormal difference of turnover and distorted operating profits have to be excluded for determining the ALP, the claim that as the assessee revenue is about Rs. 20 crores, comparables having more than 50 crores and less than 5 crores of turnover should be excluded is not acceptable because no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. It is accepted economic principle and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself;

(v) The argument that an adjustment should be made for difference in function and risk level is not acceptable because the assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data. Further, the +/-5% adjustment as the 2nd Proviso to s. 92C is intended to adjust for such differences;

(vi) The department’s argument that the amendment by FA 2009 w.e.f. 1.10.2009 to the 2nd Provio to s. 92C with regard to the +/-5% variation from the arithmetic mean of the ALP is clarificatory and procedural and so retrospective is not correct.