The Income Tax Appellate Tribunal ( ITAT ), Bangalore, has recently while deciding an appeal filed before it by an assessee, held that net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market.
The aforesaid observation was made by the Tribunal when the assessee, M/s. Arm Embedded Technologies Pvt. Ltd., a subsidiary of Arm Limited, UK, filed an appeal before it against the order dated 07/04/2021 by the National e-Assessment Centre, Delhi for A.Y. 2016-17.
The grounds of the appeal as raised by the assessee being that the order of the Deputy Commissioner of Income Tax, passed under Section 143(3) read with section 144C(13) of the Act, pursuant to the directions of the learned Dispute Resolution Panel, is bad in law and is liable to be quashed, to the extent of it being prejudicial to the Appellant, and further that on the facts and in the circumstances of the case the learned Panel and the learned AO erred in upholding the learned TPO’s approach of determining the arm’s length price for the provision of software development MOW (‘SWD’) services and the provision of marketing and sales support services (MSS’) segments of the Appellant, rejecting the value of international transaction on the provision of the same as recorded in the books of account as the arm’s length price, and rejecting the TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence, the Tribunal observed as follows :
“We note that, this issue has been considered by this coordinate bench of this Tribunal in the case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018”
“We may also further add that in terms of 1ule 10B (1) (e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market.”
“It is, not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions are not a difference which will materially affect the amount of net profit margin in the open market.”, it added.
Thus, allowing the assessee’s appeal the bench concluded:
“In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee.”
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