Brief of the Case
ITAT Bangalore held In the case of M/s. Meritor LVS India (P) Ltd. vs. ACIT that the transfer pricing officer (TPO) has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) .This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of company.
Facts of the Case
M/s Mentor LVS India Pvt Ltd (MLIPL) is a wholly owned subsidiary of M/s. Mentor LVS Australia Pty Ltd. The ultimate holding company is M/s. Arvin Mentor INC USA. The ultimate holding company M/s, Arvin Mentor Inc USA is engaged in the manufacture of auto motive components and systems. The said company is consistently ranked as a leading manufacturer of auto motive exhaust systems. M/s MLIPL is in the business of computer radiated designing of light vehicle systems.
Assessee’s operating income entirely came out of international transactions. In its TP study assessee had considered the seven comparables for analysing the pricing of its international transactions relating to the software development services segment. As per the assessee, its net margin was well within the + / – 5% of the average PLI of the comparables and therefore there was no requirement for any adjustment on the pricing of the international transactions in the software development services segment. Assessee had followed the TNM method for its TP study.
However, TPO did not accept the comparables selected by the assessee but for R. S. Software (India) Ltd and iGate Global Solutions. He rejected others citing various reasons. There after he made his own analysis and arrived at a list of 26 comparables which according to him was functionally close to that of the assessee. Though the assessee argued for a risk adjustment this was not accepted by the TPO. Nevertheless he made a negative working capital adjustment of -2.77% on the average PLI of 25.14 % of the comparables and arrived at an adjusted mean margin of 22.87 %. He thereafter worked out the short-fall on account of deficit in the international transactions relating to the software development services segment. An addition of Rs.2,81,86,754/- was made to the assessee. The assessee move to the DRP. Though the assessee raised a number of grounds, assailing the functionality of the comparables selected, the DRP chose to go along with the directions of the TPO. It confirmed the adjustment of Rs. 2,81,86,754/- recommended by the TPO. Accordingly assessment was completed.
Contention of the Assessee
The ld counsel of the assessee submitted that out of the 26 comparables selected by the TPO he was seeking exclusion of 16 companies. According to him none of these comparables selected by the TPO were part of list of the assessee. They were all functionally different and not comparable to a software development services provider. He placed reliance on the decision of coordinate bench in the case of Hewlett- Packard (India) Globalsoft P. Ltd, v. DCIT [IT (TP) A1031/Bang/2011, dt.23/09/2015].
On the issue of risk adjustment, he submitted that its risk analysis and work out of risk adjustment was unfairly rejected by the TPO. As per the Ld. AR, marketing expenditure was taken as the bench mark for deciding on the market risk, and relation of the profitability to the market risk by the TPO. Ld. AR submitted that assessee was not bearing a significant market risk since its services were only to the AE. According to him, the same situation was not present in so far as the comparables selected by the TPO is concerned. Hence it was necessary that a proper adjustment was made for the risk element for a meaningful comparison.
Contention of the Revenue
The ld counsel of the revenue submitted that Hewlett- Packard (India) Globalsoft P. Ltd., operated in a different field from that of the assessee and hence the decision of the Tribunal in the case of the said company could not be considered as a precedent. In so far as the risk adjustment was concerned, Ld. DR submitted that TPO had made a detailed analysis of the risk adjustment sought by the assessee and came to a conclusion that the market risk to which the assessee was exposed and the market risk to which the selected companies were exposed were more or less in the same bracket. According to him the risk element stood adjusted in the profits of the comparables.
Held by ITAT
Assessee is seeking exclusion of 16 comparables out of 26 companies selected by the TPO. For this it has placed reliance on the decision of coordinate bench in the case of Hewlett- Packard (India) Globalsoft P. Ltd. We find that issues before this Tribunal in the case of Hewlett- Packard (India) Globalsoft P. Ltd, was also with regard to software development services segment, that too for the very same assessment year. Services rendered by both the assessee as well as HPIGPL fell within the software development services segment, and therefore in our opinion the decision of the coordinate bench in Hewlett- Packard (India) Globalsoft P. Ltd, can be taken as a good precedent. Major grounds for exclusion of comparable were on the basis of non availability of segmental information, Functional differences e.g. KPO services are not comparable to software development services, a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible. While rejecting comparable KALS Information Systems Ltd., it was held that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) . This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company.
In so far as risk adjustment sought by the assessee is concerned, we find that TPO had considered the risk analysis done by the assessee in its TP study and came to a conclusion that the risk borne by the various comparables were more or less similar in nature to that of the assessee. TPO had cited various reasons for not giving any adjustment for the perceived risk. He submitted that the taxpayer did not furnish any computation of the risk adjustment in the TP study. The taxpayer’s single customer risk and political / country risk more than offsets any other risk differential between the taxpayer and the comparable companies. Different comparables can have different risk profiles and different profit margins. The proviso to Sec. 92C (2) provides for adopting arithmetical mean of the different prices. This provision neutralizes the effect of difference in the risk profile, if any between the tax payer and the comparables as realized risk may pull down the profitability below the risk free return. Also It is not sufficient to merely spell out risks. But, it has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability. The taxpayer has not done so.
Nothing was brought before us by the Ld. AR to show that findings of the TPO were incorrect. We are of the opinion that the risk borne by the comparables as well as the assessee were of the very same nature and therefore the effect of the risk on the profitability already stood discounted in the operational results of the comparables. We therefore find no merit in this ground raised by the assessee. In the result, assessee’s ground relating to risk adjustment is dismissed.
Accordingly appeal of the assessee partly allowed.
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