Wednesday, February 17, 2016

Projected profits of subsequent years can’t be considered for working out the PLI under TNMM

a)    Assessee, an Indian Company, entered into a transaction to provide software development services and IT enabled services to its foreign AE.
b)    Assessee used Transactional Net Margin Method (TNMM) to determine ALP of such transaction. The Operating Profit to Total Cost ratio was adopted as PLI and same was calculated by taking weighted average margin of four years, being the actual figures for the current financial year plus projected figures for the coming three years.
c)    The TPO accepted the TNMM as the most appropriate method. However, the assessee's PLI computed on the basis of profit of four years including projected profit of three years, was rejected.
d)    Accordingly, adjustment was made to assessee’s ALP by considering the operating profit margin of the assessee for the current year alone, calculated on the basis of actual figures.
e)    Aggrieved by the TP adjustment made by TPO, assessee filed the instant appeal before the tribunal.
The tribunal held in favour of revenue as under-
1)    Essence of the entire transfer pricing provisions is to compare the actual profit earned by the assessee from an international transaction with the profit earned from comparable uncontrolled transactions.
2)    It is totally impermissible to substitute actual profit earned by the assessee from an international transaction with any other profit base, either by considering the actual profits for the earlier years or by taking into account the projected profits of the subsequent years, for the purposes of determining the ALP of an international transaction.
3)    Hence, assessee was not right in working out PLI under TNMM by considering projected profits of subsequent years- [2016] 66 185 (Delhi - Trib.)

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