Brief of the Case
ITAT Jaipur held In the case of Integrated Decisions and Systems (India) Private Limited vs. ITO that these risk adjustments are only theoretically which cannot be quantified in terms of any calculation to conclude the exact adjustment in ALP. The ld counsel of the assessee had not able to quantify these adjustments in terms of statistical calculation and has not been able to demonstrate the effect of these risks on adjustment of ALP. The TPO was right by accepting the arithmetic mean of comparable of comparable companies if any risk as claimed by the appellant was concerned; it will be resulted in the arithmetic mean of all the companies as these risks adjustments also applicable on them.
Facts of the Case
The assessee company is engaged in the business of development of online support software. The service provided relate to software development, product customization and online 24X7 product technical support. The assessee company filed its e-return of income on 29/10/2007 for A.Y. 2007-08 declaring total income of Rs. 5,61,900/- and on 31/08/2008 for A.Y. 2008-09 at Rs. 3,49,140/-. The cases were scrutinized U/s 143(3). On perusal of P&L account, it revealed that the assessee had entered into an international transaction with Integrated Decisions and Systems Inc. 1650, West Bloomington USA for the development of software and support of software. The Indian Company was providing services and charging the same from the associated enterprise. These international transactions with the Associate Enterprise were referred to the Transfer Pricing Officer (TPO) U/s 92CA.
In A.Y. 2007-08, the TPO directed to make adjustment U/s 92CA at Rs. 85,74,926/- and in A.Y. 2008-09 at Rs. 1,23,23,977/- and no deduction U/s 10B would be allowed to the tax payer as per provisions of Section 92C(4). The draft order in both the years was served on the assessee thereafter the assessee filed its objection before the Dispute Resolution Panel u/s 144C (2) (b).
Risk adjustment in ALP
Ground No. 15 of the appeal for A.Y. 2007-08 is against comparing full-fledged risk bearing entities with the appellant’s captive operations without making any risk adjustment for difference between the functional and risk profile of comparable companies. The assessee claimed various risk adjustments before the TPO such as market risk, service liability risk, credit and collection risk, man power risk, price risk, foreign exchange risk, Idle capacity risk, political risk, single customer risk and country risk.
Contention of the Assessee
The ld counsel of the assessee submitted that the ld TPO and consequently the ld A.O. have modified the selection criteria used by appellant i.e. salary and wages cost ratio of 50% and applied salary and wage cost criteria of 25% to reject companies having employee cost ratio of less than 25%.
He relied on the decision in the case of Avaya India (P) Limited Vs. ACIT (ITA No. 5150/Del/2010). He further submitted that the following additional companies selected by the TPO as comparable to the appellant should be rejected on the salaries and wages cost ratio criteria i.e. rejecting companies having employee cost ratio less than 50% for F.Y. 2006-07.
Risk adjustment in ALP
The ld AR of the assessee reiterated the same argument raised before the ld TPO as well as before the ld DRP.
Contention of the Revenue
The ld Sr. DR relied on the order of the TPO as well as DRP. She argued that this filter had been used a starting point to carry out more thorough functional analysis. Since wages constitute a main cost components so this comparison would given close comparables. Therefore, she prayed to confirm the order of the Assessing Officer.
Risk adjustment in ALP
The ld Sr. DR. has supported the order of the TPO/DRP and argued that these risk adjustments are only theoretically which cannot be quantified in terms of any calculation to conclude the exact adjustment in ALP. The TPO had applied the arithmetic mean of comparables of companies which qualifies these risk adjustments.
Held by DRP
The DRP passed its order U/s 144C(5) on 08/08/2011 in A.Y. 2007-08 and on 18/07/2012 in A.Y. 2008-09 by considering the assessee’s submissions. The DRP considered the assessee’s total objection-22 in A.Y. 2007-08 and gave the detailed order on objection wise and confirmed the order of the TPO on objection No. 1 by observing that the panel has come to a conclusion that there were flow in the search process carried out by the assessee and the TPO has carried out rerun of the search process. The assessee’s objection on considering the three companies identified by the assessee in T.P. documentation and calculated their average mean @ 15.16% and assessed operating margin @ 11.66% was within +/-5% range of arithmetic mean on the basis of three comparables. The assessee submitted that the transaction was within the arm’s length price. The DRP rejected the assessee’s submission by considering the Hon’ble Delhi ITAT’s decision in the case of Vedaris Technologies Ltd. i.e. comparable can be one or more than one.
Further he held that the assessee has not demonstrated how the earlier years circumstances have affected the margin in the current year. As per Rule 10B(4) of the Rules for benchmarking an international transaction/data for comparables used should be of the year in which the transaction took place. The DRP held that the TPO has correctly used single year data for T.P. analysis. A fresh search conducted at the time of TP audit enabled in obtaining missing or incomplete data, which improving comparability analysis. The DRP further considered the remaining objections point wise and directed the Assessing Officer to complete the assessment. The TPO vide order dated 15/10/2010 had recomputed the ALP on the basis of direction issued by the DRP. The Assessing Officer calculated the ALP at Rs. 8,83,79,859/-. The assessee charged Rs. 7,95,98,205/- and exchanged dues amounting to Rs. 4,55,795/-. The difference being adjusted U/s 92CA had been computed at Rs. 83,25,858/-. The same was added in the income of the assessee. Similarly in A.Y. 2008-09, this ALP was calculated by the Assessing Officer after considering the direction of DRP and TPO at Rs. 12,00,08,165/- whereas the appellant had charged from AE for the international transaction at Rs. 11,19,31,568/-, therefore, the difference of Rs. 80,76,597/- was added in the income of the assessee.
Risk adjustment in ALP
She rejected the assessee’s claim of risk adjustment and held that no risk adjustment is given as the single customer risk and country/political risk of the taxpayer combined with the arithmetic mean price considered in the case of comparable companies nullifies the risk differential, if any, between the tax payer and comparable independent enterprises.
Held by ITAT
The TPO has applied comparable case where salary and wages cost ratio was less than 50% whereas in assessee’s case this ratio was 63.91%. In preceding year also, the TPO had applied the salary and wages ratio on the basis of +/- 15% range from the employees cost ratio of the assessee, which was maximum 74.15% in A.Y. 2006-07 and accordingly selected comparables companies having employee cost to total cost ratio in the range of 59.15% to 89.15%, therefore, we allow the assessee’s appeal on this ground.
For grounds No. 12 and 13 for A.Y. 2007-08, the ld AR for the assessee has submitted that the ld TPO and consequently the ld Assessing Officer had additionally considered the dissimilar companies as comparable to the appellant. The appellant had analysed these companies in detail and provided the detailed reasons for rejection of these companies.
The ld AR for exclusion of 12 comparables has relied upon recent decision of the Hon’ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd. in ITA No. 1204/2011 order dated 11th July, 2013 wherein large and bigger company in the area of development of software held cannot be a benchmark or equated with the small company.
It is a fact that the TPO accepted the TNMM method as the most appropriate method for benchmarking the international transaction of appellant using OP/OC as a PLI. The objection of the assessee had not allowing use of multiple year of data for the purpose of determining of ALP has already been considered by the Coordinate Bench in ITA No. 27/JP/2011 for A.Y. 2006-07 and held by considering the case of Mentor Graphics Noida (P) Ltd. 109 ITD 101, Aztec Software, 294 ITR 322 and the recent decision of ITAT Delhi Bench in the case of ST Microelectroncis (P) Ltd. Vide order dated 3-06-2011 in ITA No.1806,1807/Del/2008. In this case it was held that “The expression “shall’’ used in the Rule makes it clear that it is mandatory to use current year data first and if any circumstances reveal an influence on the determination of ALP in relation to the transaction being compared than other data for period not more than two years prior to such financial year may be used. Hence, the TPO was justified in directing the assessee company to conduct first search of the comparables during the transfer pricing proceedings as the Rule 10B(4) of the IT Rules require used of current year data for the purpose of comparability analysis.”
The ld AR’s arguments for not considering 12 comparables referred in in its submission has found logical as margin of these companies were found much more than the assessee has disclosed. The assessee also argued that these companies are dissimilar to the company of the assessee either employees cost, nature of business, functional differences etc., which was submitted before the TPO for not considering these comparables as comparable with the assessee. The TPO/DRP had not given any specific finding for not considering the assessee’s explanation submitted during the course of assessment proceedings on dissimilar companies. Finally, the comparables out of 26 comparables considered by the TPO and after considering the assessee’s objection for non comparable cases in case of 12 comparables, the average meaning was worked out by the AR at 15.62%. The assessee has shown margin @ 11.66%. The assessee’s argument is found convincing that these margins are within +- of 5% of range. Therefore, the Coordinate Bench in A.Y. 2006-07 has considered the variation of ALP +- 5% and held that no adjustment could be made to ALP by relying on ITAT Jaipur Bench decision in the case of Shankar Exports Vs. Addl.CIT, 132 TTJ 107 and Ravi Kumar Rawat Vs ITO 134 TTJ 634. Therefore, we allow grounds No. 12 and 13 of the appeal in favour of the assessee. The result no adjustment is to be made in ALP.
Risk adjustment in ALP
The ld AR had not able to quantify these adjustments in terms of statistical calculation and has not been able to demonstrate the effect of these risks on adjustment of ALP. The ld TPO was right by accepting the arithmetic mean of comparable of comparable companies if any risk as claimed by the appellant was concerned, it will be resulted in the arithmetic mean of all the companies as these risks adjustments also applicable on them. These additions have been confirmed by the ITAT in the cases of Vedaris Technology (2010-TII-10-ITAT-Del-TP), M/s Marubeni India Private Ltd. (2011-TII-36-ITAT-Del-TP), M/s ADP Private Limited (201TII-44-ITATHyd- TP), M/s Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITATMum- TP), M/s ST Micro Electronics (2011-TII—63-ITAT-Del-TP), M/s Exxon Mobil company India Pvt. Ltd. (2011-TII-68-ITAT-Mum-TP) and M/s Deloitte Consulting India P Ltd. ITA No. 1082/Hyd/2010 and held that the assessee could not show how such difference in risk and functions affected result of comparables. The assessee for comparing the case with Infosys and Wipro had claimed that the appellant had negligible risk as it is a captive unit providing service to its AE and is remunerated on cost which marked up basis. Accordingly we dismiss this ground of appeal.
Accordingly appeal of the assessee partly allowed.