Facts of the Case

  • The assessee, Stratex Networks (India) Pvt. Ltd., was a wholly owned subsidiary of Digital Microwave (Mauritius) Ltd., which itself was a subsidiary of Digital Microwave Corporation USA.
  • The assessee was engaged in installation, commissioning, and maintenance of microwave link equipment in India.
  • The Associated Enterprise manufactured and directly supplied microwave equipment to Indian customers, while the assessee booked orders and received commission income from the Associated Enterprise.
  • Warranty services provided in India also constituted admitted international transactions.
  • The assessee independently undertook installation and annual maintenance activities under separate contracts and considered such transactions as domestic transactions.
  • The Transfer Pricing Officer (TPO) adopted TNMM and while computing PLI included revenues and costs arising from installation, commissioning, and maintenance activities along with international transactions.
  • Based on this inclusion, the TPO proposed transfer pricing adjustment amounting to ₹1,19,41,893/-.

 Issues Involved

  1. Whether domestic transactions relating to installation, commissioning, and maintenance services could be treated as international transactions under Sections 92B(1) or 92B(2) of the Income Tax Act.
  2. Whether operating revenue and operating costs from domestic activities could be included for computation of Profit Level Indicator (PLI) under TNMM while determining Arm's Length Price of international transactions.
  3. Whether the Transfer Pricing Officer was justified in making transfer pricing adjustment by including unrelated domestic transactions. 

Petitioner’s Arguments (Revenue)

  • The Revenue argued that inclusion of installation, commissioning, and maintenance revenues and costs in the computation of PLI was justified.
  • It was contended that such services were intricately connected with international transactions involving warranty support services and commission income.
  • Therefore, according to Revenue, these transactions should form part of overall profitability calculations for transfer pricing purposes. 

Respondent’s Arguments (Assessee)

  • The assessee argued that installation and maintenance services were undertaken under independent contracts and were purely domestic transactions.
  • These activities had no connection with international transactions involving commission income and warranty services.
  • Therefore, inclusion of such domestic transactions for computing PLI was contrary to transfer pricing provisions.
  • It was also submitted that the actual PLI for international transactions was 18.98%, which was higher than comparable companies' PLI of 16.34%; hence no adjustment was warranted. 

Court Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and upheld the findings of the Commissioner of Income Tax (Appeals) and the Tribunal.

The Court observed:

  • Installation, commissioning, and maintenance agreements were independent agreements and were not connected with warranty support services or commission transactions.
  • The TPO himself had not treated those transactions as international transactions and therefore had not proposed adjustment relating to them.
  • Transactions relating to installation and maintenance did not satisfy conditions under Section 92B(1) or Section 92B(2).
  • No material existed to establish any prior arrangement or substantive determination of transaction terms by the Associated Enterprise.
  • Since the assessee's PLI in relation to international transactions was already higher than comparable entities, no transfer pricing adjustment was required.

Final Order: Revenue appeal dismissed. No substantial question of law arose for consideration.

Important Clarification

This judgment clarifies that:

  • Domestic transactions cannot automatically be included in transfer pricing computations merely because they have some business connection with international transactions.
  • Only transactions qualifying under Sections 92B(1) and 92B(2) can be considered international transactions.
  • Independent domestic contracts remain outside the scope of transfer pricing adjustment.
  • Profit Level Indicator under TNMM must be computed strictly with reference to relevant international transactions only.

 Sections Involved

  • Section 92B(1) – Definition of International Transaction
  • Section 92B(2) – Deemed International Transaction
  • Section 92C – Computation of Arm's Length Price
  • Section 92CA(3) – Reference to Transfer Pricing Officer
  • Section 260A – Appeal before High Court

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:2302-DB/BDA06052013ITA3532011.pdf

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