The Tax Tribunal Bench in Delhi has held in the case of Headstrong Services Private Limited that even units which enjoy Tax holiday can be subjected to Transfer Pricing (‘TP’) adjustments, rejecting ‘no base erosion’ argument put forward on behalf of the Taxpayer.

The Delhi bench refused to follow the ruling of the co-ordinate Mumbai Bench  rendered in the case of Tata Consultancy services, wherein it was held that the TP provisions are not applicable to Tax holiday units. The Delhi bench ruled that it was bound to follow the earlier ruling given by the Special Tribunal Bench in Aztec’s case, which upheld applicability of TP provisions even to Tax payers enjoying a Tax holiday.

Certain other issues decided by the Tribunal are briefly re-capitulated below:

Use of Past year’s data and future projection

The Tribunal also rejected the use of past years’ data as well as future projections for computation of the Transaction Net Margin (‘TNM’) of the Tax payer.

Alternate TP defense using revenue distribution ratio as a ‘CUP’

An interesting alternate defense was raised on behalf of the Taxpayer – that of using revenue distribution ratio as a Comparable Uncontrolled Price (CUP). It was contended that 80% of the revenues which were earned by the Associate Enterprise was shared with the Taxpayer, as against Tax Payer sharing only 77.50% of its Revenues with other third parties, in respect of certain other service contracts.  The Tribunal held that such a comparison was not valid and further  the distribution ratio did not constitute a CUP.

Exclusion of foreign exchange fluctuations in margin computation

The Tribunal ruled that forex fluctuation impacts both the Taxpayer as well as the comparable companies selected for TNM analysis and therefore there was no reason to make any adjustment for the same.

Right of Taxpayer to challenge comparable companies for the first time before Tribunal

The Tribunal upheld the right of the Taxpayer to challenge certain comparable companies for the first time before the Tribunal. The earlier ruling of Special Bench in the case of Quark Systems was followed. However, instead of deciding on the comparability or otherwise of these companies, the issue was restored to lower authorities for their consideration.

On Comparables’ selection

The Tribunal accepted Taxpayer’s argument that companies like Wipro, Infosys which own IPRs and have significant R&D expenses are not comparable to that of Taxpayer. Further, companies which are engaged in software product development were also held non-comparable to the Taxpayer, which was a service provider.