Case Law Details
Assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them.
In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company. The assessee’s contention that the risk adjustment should be at 5.5% or at the difference of prime lending rate of the RBI and the banks is not acceptable to us. Therefore, we direct the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage of risk adjustment to be made in accordance with law. This ground is accordingly, allowed for statistical purposes.
INCOME-TAX APPELLATE TRIBUNAL, BANGALORE
I.T.A. No. 1237(Bang.)/2010 – (Assessment year: 2006-07)
M/s Intellinet Technologies India Pvt.Ltd.
Vs
The Income-tax Officer
Date of pronouncement: 30-03-2012
ORDER
This is assessee’s appeal for the assessment year: 2006-07.
2. The assessee has raised the following grounds of appeal;
“1. The order passed by the ld. AO based on the directions issued by the DRP is bad in law.
2. The ld. AO relied on the directions issud by the DRP. The DRP has upheld the order of the TPO.
3. The order of the TPO suffers from errors and is unjustified on account of the following;
a. The TPO erred in making an order u/s 92CA and directing adjustments towards shortfall to arm’s length price to the extent of Rs.62,55,873/-
b. The TPO erred in rejecting the documentation maintained by the appellant and conducting a fresh search of the comparables.
c. The TPO erred in obtaining the information and documents not available in public domain by exercising his power u/s 133(6) of the IT Act, 1961
d. The TPO erred in adopting an arbitrary basis of filtering comparable cases, summarily rejecting the comparables of the petitioner, arbitrarily rejecting the objections raised by the petitioner against the comparables chosen by her and arbitrarily choosing the comparables not comparable with that of the transactions of the petitioner.
e. The DRP erred in not accepting the contention of the appellant in relation to the adjustment sought by he appellant towards receivable, marketing and credit risk borne by the comparables.
f. The TPO erred in adopting the arm’s length margin of 19.03% of the operating costs and fixing the arm’s length price at Rs.842.88 lakhs as against the transactional value of Rs.780.3 1 lakhs.
4. The DRP erred in confirming the action of the AO while computing the deduction u/s 10A by excluding an amount of Rs. 1,05,858/- from the ambit of export turnover without excluding the same from ambit of total turnover.
2.1 The assessee has also filed the following revised additional ground of appeal;
“1. Without prejudice to the grounds taken earlier, the TPO erred or was unjustified in not providing the benefit of +/- 5 percent of the range at the time of computing the transfer pricing adjustment”.
3. Ground nos. 1 &2 are general in nature and therefore, needs no adjudication.
4. Coming to the ground no.3, we find that the assessee is challenging the adjustment made by the TPO to the arm’s length price by rejecting the documentation maintained by the assessee and conducting the search of the comparables and also obtaining the information and documentation not available in public domain by exercising his powers u/s 133 of the IT Act, 1961. We find that the sub-ground (a) is general in nature and needs no adjudication. Sub-ground- (b) is rejected as not pressed by the learned counsel for the assessee. As regards sub-ground¬(c) & (d) are concerned, we find that these issues are covered by the decision of the co-ordinate Bench of this Tribunal( to which one of us ie. JM is a signatory) in the case of M/s Genisys Integrating Systems (India) Pvt.Ltd., in ITA No.1231(BNG)/2010 dated 05-08-2011 wherein this Tribunal has directed the AO to adopt the filter of turnover and also to give the assessee an opportunity of rebutting the information and documents obtained by the TPO by exercising his powers u/s 133(6) of the IT Act. Respectfully following the decision of the co-ordinate Bench of the Tribunal, we remand these two issues to the file of the AO to re-consider the same as per the guidelines issued in the case of M/s Genisys Integrating Systems (India) Pvt.Ltd., in ITA No. 1231(BNG)/2010. It is further directed that the assesee shall raise its objection to the additional comparables adopted by the TPO and the TPO/AO shall call for all the information from the comparables (adopted by him by obtaining the information u/s 133(6) of the IT Act) to clarify the queries raised by the assessee to arrive at the appropriateness of the comparables and as a last resort shall also give the assessee an opportunity to cross examine the parties if it is found necessary after all the information being furnished to the assessee does not satisfy the assessee’s queries.
5. Coming to the sub-ground (e) of the grounds of appeal, the learned counsel for the assessee submitted that while making the transfer pricing adjustment to arrive at the ALP in the case of international transaction between the assessee and its associated enterprises, the TPO is bound to conduct the FAR analysis. He submitted that the assessee was the captive service provider rendering services on a cost plus basis. Thus, according to the learned counsel for the assessee, the assessee has no risk whatsoever as compared to the comparables adopted by the TPO. He drew our attention to the transfer pricing analysis adopted by the assessee and the risk adjustment claimed by the assessee at 5.5% as compared to its comparables. He submitted that the comparables adopted by the assessee and also TPO are prone to various risks such as market risk, technical risk etc., and these risks are taken into consideration, the net margin of these companies would come down substantially which would be on par with the ALP adopted by the assessee. Thus, according to him, the TPO ought to have allowed the risk adjustment before making comparison of the net margin of the assessee and comparables.
6. The learned DR however, opposed the contention of the assessee and relied upon the orders of the TPO and DRP. The learned DR submitted that the assessee being a captive service provider is having a single customer which is called ‘single customer risk’ as observed by the TPO. Thus, according to him, the risk attributable to the comparables by the assessee are also equivalent to the risks attributable to the assessee. Further, as regards the risk adjustment of 5.5% adopted by the assessee, the learned DR submitted that the assessee has not given any basis for arriving at such an adjustment. He has drawn our attention to the relevant para of TPO and the DRP, wherein such an observation is made.
6.1 In the rejoinder, the learned counsel for the assessee submitted that the assessee has no doubt not given any basis for arriving at the risk adjustment of 5.5% to the ALP, but he suggested that the difference between the prime lending rate of interest by RBI to the banks and the interest at which the banks lend loans to their customers is to be taken into consideration for the purpose of risk adjustment.
7. Having heard both the parties and having considered the rival contentions, we find that the assessee has claimed the risk adjustment which is not allowed by the TPO on the ground that the assessee also has the risk of having a single customer. The question before us is as to whether the risk of having a single customer is equivalent to the marketing and technical risk attached to the comparables. According to the TPO, the assessee has the ‘single customer risk’ meaning, if the single customer refuses to have any dealings with the assessee, the assessee would lose all of its business and there would be no profit at all. But, as we see it, the risk of having a single customer is anticipated risk which may or may not happen. What we have to see is the position in the relevant period whether the assessee had encountered such a risk during the relevant period.
7.1 As seen from the records, the assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company. The assessee’s contention that the risk adjustment should be at 5.5% or at the difference of prime lending rate of the RBI and the banks is not acceptable to us. Therefore, we direct the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage of risk adjustment to be made in accordance with law. This ground is accordingly, allowed for statistical purposes.
8. As regards sub-ground-(f), we find that it is consequential to sub¬ground-(e) and therefore, this issue is also remanded to the file of the APO/O.
9. As regards ground no.4, we find that this issue is covered in favour of assessee by the decision of the Hon’ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., Vs ACIT cited supra. Respectfully following the same, we direct the AO to exclude the amount of Rs. 1,05,858/- from the export turnover as well as the total turnover for the purpose of computing the deduction u/s 10A of the IT Act.
10. As regards the additional ground of appeal, we find that this issue is also covered by the decision of this Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt.Ltd., cited supra and also in the case of M/s Tatra Vectra Motos Ltd., in ITA No. 1284(B) / 2010 dated 31- 01-2012 to which one of us is a signatory. Respectfully following the same, we direct the AO to give plus or minus 5% variation for the purpose of computing the ALP. This ground of appeal is partly allowed for statistical purposes.
11. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the 30th March, 2012.
