Risk adjustments can be given only on company to company basis and not as thumb rule

Brief of the case:- The Hyderabad bench of the Income Tax Appellate Tribunal (Tribunal) recently pronounced its ruling in the case of ADP Private Limited Vs. DCIT (Hyderabad Bench), ITA No: 155/Hyd/2009 , on transfer pricing issues arising from provision of software services by the Taxpayer to its Associated enterprise (AE). The Tribunal ruled in favor of the Revenue upholding the adjustment proposed by the Transfer Pricing Officer (TPO).

Facts of the case

The Taxpayer is engaged in rendering software development services to its AE. During the AY 2004-05, the Taxpayer has provided software services to its AE at Cost plus markup of 10% and received a sum of Rs 39,04,34,858. The Transfer Pricing Officer (TPO) rejected 10 com parables from 14 com parables selected by the Taxpayer on the ground that they had substantially related party transactions or the companies were functionally different. The TPO computed the arithmetic mean of operating profit/cost of remaining 4 com parables at 17.66% and calculated the adjustment.

Being aggrieved by the said transfer pricing order, the Taxpayer filed an appeal before the Commissioner of Income Tax – Appeals i.e. the CIT (A). The CIT (A) upheld the action of TPO but accepted the contention of Taxpayer to provide marginal benefit of 5% margin to the Taxpayer. Hence CIT(A) reduced the adjustment to only Rs 42,82,338.

Aggrieved by the order of the CIT(A), Taxpayer as well as Revenue preferred appeals before the Tribunal.

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