CIT vs. Stratex Net Works (India) (P.) Ltd; 215 Taxman 533 (Del): 33 taxman.com 168 (Del):
The assessee was a wholly owned subsidiary of a Mauritius company which, in turn, was a wholly owned subsidiary of a company of USA. US company was an associated enterprise of the assessee. All the equipments for microwave links were manufactured by the said associated enterprise (AE). The orders in India for installation of these equipments were booked by the assessee, for which it received commission from its AE. Services against warranty given by AE were also rendered by assessee. Apart from that, the assessee also undertook installation of the said equipment and was also undertaking annual maintenance to its Indian customers vide a separate contact. To compute profit level indicator (PLI) in respect of international transactions, the Transfer Pricing Officer had adopted the Transactional Net Margin Method (TNMM) as the most appropriate method u/s. 92C(1)(e). While computing the PLI, the Transfer Pricing Officer (TPO) took into account not only the operating revenue and operating costs of the international transactions involving warranty services and commission income, but also took into account the operating revenue and operating costs of the installation/commissioning and maintenance services which were domestic transactions and made TP adjustment to assessee’s income. The Commissioner (Appeals) deleted said addition. The Tribunal concurred with the order of the Commissioner (Appeals).
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) It is evident that the Transfer Pricing Officer, himself, did not consider installation/commissioning and maintenance to be international transactions inasmuch as no adjustment was made by him in respect thereof. The adjustments made to the extent of Rs. 1,19,41,893/- were only with regard to the value of international transactions relating to commission on sales and warranty support service.
ii) On going through the order passed by the Commissioner (Appeals) as also the impugned order passed by the Tribunal, it was clear that both these authorities have returned a finding of fact that the installation/commissioning and maintenance services were not part of the international transactions. In fact, the Tribunal held that the installation/commissioning and maintenance agreements were independent agreements unconnected with the transactions of warranty support services and the transaction which generated the commission income.
iii) The Tribunal noted that the equipment had been supplied to 40 customers by the/assessee’s associated enterprise. However, only three of them had availed of the installation services from the assessee. The Tribunal also noted that a corroborative circumstance for construing the transactions of installation/commissioning and maintenance as domestic transactions was that, in the order of the TPO itself, no adjustment was made in respect of these transactions. The Tribunal further held that since the profit level indicator shown by the assessee on the international transactions of waranty service and commission income was 18.98%, there was no need for any adjustment in the arm’s length prices of these transactions inasmuch as the profit level indicator of the comparables were determined by the Transfer Pricing Officer at 16.34%, which was lower.
iv) It is in this backdrop that the Tribunal felt that there was no reason to examine the issue on the argument of the assessee that the Transfer Pricing Officer had not applied the proper comparables while working out the profit level indicator of comparables.
v) From the foregoing discussion, it is evident that the transactions pertaining to the installation/ commissioning and maintenance services were not international transactions as contemplated u/s. 92B(1). They were also not deemed international transactions u/s. 92B(2) of the said Act because none of the conditions stipulated therein of a prior agreement/existing between the customers of the assessee and the associated enterprise had been established as a fact. Moreover, there is no finding that the terms of the transaction of installation/commissioning as well as maintenance had been determined in substance between the customers and the assessee by the associated enterprise.
vi) In the absence of such findings, it cannot be deemed that the transaction of installation/commissioning as well as provision of maintenance services by the assessee to its domestic customers in India were international transactions falling within section 92B(2).
vii) As such, no substantial question of law arises for the consideration of this court.”
