Transfer pricing comparability requires a close functional alignment; differences in service profiles and ownership of intangibles disqualify certain companies as comparables.

ORDER

PER ANUBHAV SHARMA, JM:

This appeal is preferred by the Revenue against the order dated 28.02.2018 of the Commissioner of Income-tax (Appeals)-44, New Delhi (hereinafter referred to as the ld.CIT(A) or the ld. FAA) in Appeal No.139/2017-18/CIT(A)-44 arising out of the appeal before it against the order dated 28.03.2014 passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the DCIT, Circle-9(1), New Delhi (hereinafter referred to as the Ld. AO). The assessee has filed Cross Objection being CO No.144/Del/2018.

2. Heard and perused the records. The written submissions filed from both the sides are duly taken into consideration. The primary facts asserted by the Assessee are that it is a captive service provider and undertakes Integrated Circuits (“ICs”) design implementation, maintenance and verification services for ST Group entities (“AEs”) based on the guidelines/ instructions provided by the AEs. Thus, the role of the assessee is akin to that of a risk mitigated captive design and development service provider and it is remunerated on a cost plus revenue model. The operating profit margin of the assessee submitted in the Transfer Pricing Documentation for the purpose of benchmarking was 10.40% (Considering FOREX as operating) and for benchmarking the international transaction of provision of I/C design implementation and maintenance services, the assessee considered the following 20 comparable companies with working capital adjusted arithmetic mean of 7.82% and risk adjusted operating profit margin (OP/OC) of 2.12%:-

2.1 However, the TPO cconsidered the following 19 companies as comparable:-

2.2. The TPO, for the purpose of benchmarking the transaction of provision of I/C design implementation and maintenance services considered the FOREX fluctuation and provision of doubtful debts as non-operating in nature and computed the operating margins of the assessee at 7.38%. The TPO accordingly, made an adjustment of Rs 52,57,03,976 in respect of international transaction of provision of IC Design and Software Development Services undertaken by the assessee.

2.3. The CIT(A) vide