DCIT, Hyderabad v. M/s ADP Pvt. Ltd, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B' HYDERABAD BEFORE SHRI G.C.GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.106/HYD/2009 : ASSESSMENT YE AR 2004- 05 M/S. ADP PRIVATE LIMITED HYDERABAD. ( PAN AAACW 2655 C ) V/S. DY. COMMISSIONER OF INCOME- TAX CIRCLE 1(1) HYDERABAD (APPELLANT) (RESPONDENT) AND ITA NO.155/HYD/2009 : ASSESSMENT YE AR 2004- 05 DY. COMMISSIONER OF INCOME- TAX CIRCLE 1(1) HYDERABAD V/S. M/S. ADP PRIVATE LIMITED HYDERABAD. ( PAN AAACW 2655 C ) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJAN VORA DEPARTMENT BY : SMT. VASUNDHARA SINHA O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER: THESE CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE DEPARTMENT- ARE DIRECTED AGAINST THE ORDER OF THE CI T(A) III HYDERABAD DATED 18.11.2008 FOR THE ASSESSMENT YEAR 2004-05. 2. THE MAIN ISSUE ARISING FOR CONSIDERATION IN THESE CRO SS APPEALS IS AGAINST THE ADJUSTMENTS MADE UNDER S.92CA OF THE ACT. ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 2 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPA NY IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES TO I TS ASSOCIATED ENTERPRISES. DURING THE PREVIOUS YEAR RELEVANT TO ASSESSME NT YEAR 2004-05 ASSESSEE RECEIVED A SUM OF RS.39 04 34 858 FOR THE SERVICES RENDERED AT A COST PLUS MARK UP OF 10%. FOR THE PURPOSE OF ESTABLISHI NG THE ARM'S LENGTH PRICE(ALP) OF ITS INTERNATIONAL TRANSACTIONS WITH ASSOCIAT ED ENTERPRISES THE ASSESSEE UNDERTOOK THE TRANSFER PRICING STUDY AND SUBMITTED THE TRANSFER PRICING DOCUMENT TO THE TRANSFER PRICING OFFICER TO WHOM THE CASE WAS REFERRED BY THE ASSESSING OFFICER. THE TPO HOWEVER DID NOT AGREE WITH THE ARM'S LENGTH PRICE DETERMINED BY THE ASSESSEE FOR THE REA SON THAT THE ASSESSEE USED TWO YEARS DATA VIZ. FINANCIAL YEARS 2002-03 AND 2003-04. OUT OF THE FOURTEEN COMPARABLE CASES SELECTED BY THE ASSESSE E TEN COMPARABLE CASES WERE NOT ACCEPTED BY THE TRANSFER PRICING OFFICER ON THE GROUND THAT THEY HAD SUBSTANTIALLY RELATED PARTY TRA NSACTIONS OR THE COMPANIES WERE FUNCTIONALLY DIFFERENT. THE TRANSFER PRI CING OFFICER ACCEPTED THE REMAINING FOUR COMPARABLE CASES AND COMPUTED THE ARI THMETIC MEAN OF OPERATING PROFIT/COST AT 17.66% AS AGAINST 10.56% SHOWN BY THE ASSESSEE. HE ACCORDINGLY DETERMINED THE ARM'S LENGTH PRICE AT RS.4 1 54 91 785 AS AGAINST THE EXPORT TURNOVER SHOWN BY THE ASSESSEE AT RS. 39 04 34 858. THIS RESULTED IN AN ADDITION OF RS.2 50 56 927 BEING MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIFFERENTIAL ADJUSTMENT UNDER S. 92CA OF THE ACT VIDE COMPLETING THE ASSESSMENT ON A TOTAL INCOME OF RS.2 60 41 830 VIDE ORDER DATED 18.12.2006 PASSED UNDER S.143(3) OF THE ACT. 3. ON APPEAL THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER AS FAR AS THE REJECTION OF THE TEN COMPARABLE CASES IS CONCER NED BUT ACCEPTED THE CONTENTION OF THE ASSESSEE WITH REGARD TO MA RGINAL BENEFIT OF 5% IN TERMS OF S.92C(2) OF THE ACT OBSERVING THAT THE SAME WAS NOT CONSIDERED BY THE TRANSFER PRICING OFFICER AS THERE IS NO DISCUSSION ON THIS ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 3 ISSUE IN THE ORDER OF THE TRANSFER PRICING OFFICER. HE A CCORDINGLY DIRECTED THE ASSESSING OFFICER TO ALLOW THE BENEFIT OF 5% MARGIN TO T HE ASSESSEE IN TERMS OF S.92C(2) OF THE ACT. ON THAT BASIS HE CONCLUDED TH AT THE LOWER RANGE OF ARMS LENGTH PRICE AFTER ALLOWING 5% MARGIN COMES TO RS.3 9 47 17 196 AS AGAINST THE ARM'S LENGTH PRICE DETERMINED BY THE ASSESSI NG OFFICER AT RS.41 54 91 785 AND THE EXPORT TURNOVER SHOWN BY THE ASSESSEE OF RS.39 04 34 858 WHICH RESULTED IN THE RESTRICTION OF D IFFERENTIAL ADJUSTMENT ONLY TO RS.42 82 338. THE CIT(A) THUS PARTLY ALLOW ED THE CLAIM OF THE ASSESSEE ON THIS ISSUE. 4. AGGRIEVED BY THE ORDER OF THE CIT(A) ASSESSEE AS WELL AS THE DEPARTMENT PREFERRED APPEALS ON THIS ISSUE. 5. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATING THE CONTENTIONS URGED BEFORE THE LOWER AUTHORITIES SUBMITTED THAT T HE CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE APPLICATION OF THE TRANSACTI ONAL NET MARGIN METHOD WITHOUT MAKING APPROPRIATE ADJUSTMENTS FOR DIFFERENCE IN ACCOUNTING POLICIES AND RISKS BETWEEN THE CONTROLLED TRANSACTIONS AND COMPARA BLE UNCONTROLLED TRANSACTIONS IN ACCORDANCE WITH PROVISIONS OF RULE 10B(1)( E). HE FURTHER SUBMITTED THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIE D IN REJECTING OF CONTEMPORANEOUS DATA I.E. DATA EXISTING BY THE DUE DA TE OF FILING OF RETURN OF INCOME AND MULTIPLE YEAR DATA OF COMPARABLE COMPANI ES IN DETERMINATION OF ARM'S LENGTH PRICE. HE ALSO SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN USING THE FINANCIAL INFORMATION OF THE COM PARABLE COMPANIES PERTAINING TO THE FINANCIAL YEAR 2003-04 ONLY AS THE SAME WAS NOT AVAILABLE AT THE TIME OF PREPARING THE DOCUMENTATION. HE ALSO Q UESTIONED THE ACTION OF THE ASSESSING OFFICER IN NOT UNDERTAKING AN OBJECTIVE ANALYSIS OF THE COMPANIES VIS-A-VIS THE FUNCTIONS AND RISKS UNDERTAKEN BY THE ASSESSEE FOR SELECTION OF THE COMPARABLE COMPANIES. REFERRING TO RUL E 10B(1)(E) OF THE ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 4 RULES IT IS SUBMITTED THAT RULE 10B(1)(E)(III) PROVI DES THAT AN ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGIN OF INDEPENDENT CO MPARABLE COMPANIES TO TAKE INTO ACCOUNT THE DIFFERENCES IN FUNCTIONS AN RIS KS. INTERNATIONAL COMMENTARIES ON TRANSFER PRICING ALSO RECOGNIZE THAT ADJU STMENTS MUST BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN CONTROLLED AND U NCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTLY EFFECT THE PRICE CHAR GED OR RETURN REQUIRED BY INDEPENDENT ENTERPRISES AND AS SUCH IN NO EVENT CAN U NADJUSTED INDUSTRY'S AVERAGE RETURNS THEMSELVES ESTABLISH ARM'S LEN GTH CONDITIONS. HE SUBMITTED THAT ONE OF THE PRINCIPAL ELEMENTS FOR TRAN SFER PRICING PURPOSES IS THE ANALYSIS OF RISKS ASSURED BY THE RESPECTIVE PARTIES I N THE OPEN MARKET IN THEORY AND THE ASSUMPTION OF INCREASED RISK IS NORMALLY COMPENSATED BY AN INCREASE IN THE EXPECTED RETURN. ACCORDINGLY HE SUBMITT ED THAT CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE ONLY WHEN A DJUSTMENTS WITH RESPECT TO SIGNIFICANT DIFFERENCES BETWEEN THEM IN THE RI SKS ASSUMED IS MADE. IT IS FURTHER SUBMITTED THAT AS MENTIONED IN TH E TRANSFER PRICING REPORT THE ASSESSEE FUNCTIONS UNDER A LIMITED RISK ENVIRO NMENT WITH MOST OF THE RISK BEING ASSUMED BY THE ASSOCIATED ENTERPRISES WHICH IS AN UNDISPUTED FACT. THE COMPARABLE SELECTED FOR THE ANALYS IS INCLUDE COMPANIES WHICH HAVE FAIRLY DIVERSIFIED AREA OF SPECIALI ZATION PERFORM ADDITIONAL FUNCTIONS VIZ. MARKETING ETC. AND BEAR MO RE RISKS AKIN TO ANY THIRD PARTY INDEPENDENT SERVICE PROVIDER. IN VIEW OF THE LIMITED FUNCTIONS PERFORMED AND LIMITED RISK BORNE BY THE ASSESSEE IT CAN B E CHARACTERIZED AS A CONTRACT SERVICE PROVIDER OPERATING IN A 'RISK MITIGAT ED ENVIRONMENT' VIS-- VIS THE COMPARABLE COMPANIES WHO PERFORM 'ENTREPRENEURI AL RISK TAKING FUNCTIONS' AND THEREFORE BEAR 'ENTREPRENEURIAL RISKS'. HE SUBMITTED THAT IT IS AN ESTABLISHED THEORY THAT REWARDS FOLLOW RISKS AND THER EFORE COMPANIES THAT BEAR ENTREPRENEURIAL RISK ARE REWARDED WITH MORE PRO FITS FOR THE ADDITIONAL RISKS BORNE BY THEM. IN THIS CONTEXT ATTENTION IS INVI TED TO PAGES 54 75 TO 83 OF THE PAPER BOOK WHEREIN SUMMARY OF THE KEY RISK S IDENTIFIED BY THE ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 5 ASSESSEE WHICH ARE BORNE BY THE COMPARABLE COMPANIES VIS-- VIS THE ASSESSEE WHO IS INSULATED FROM THOSE RISKS IS FURNISHED. FU RTHER IT IS SUBMITTED THAT THE ASSESSEE COMPANY BEARS LESSER BUSINESS RISK T HAN INDEPENDENT COMPARABLE COMPANIES DUE TO THE NATURE OF ITS REVENUE MODEL. IT IS GUARANTEED OF PROFITS BY WAY OF A MARK-UP-ON COST S INCURRED REGARDLESS OF ITS SUCCESS OR FAILURE. THE ASSESSEE HAS BEEN PROVIDING SER VICES TO ITS ASSOCIATED ENTERPRISES OVER THE LAST TEN YEARS AND HAS BEEN GROWING YEAR AFTER YEAR AND MAKING PROFITS IRRESPECTIVE OF GENERAL PERFORMANCE OF THE IT INDUSTRY IN INDIA. WHILE THE ASSESSEE DOES NOT BEAR ANY RISK OF INCURRING LOSSES DUE TO UNDER UTILIZATION OF CAPACITY OR INSUFFICIE NT BUSINESS FORM THE ASSOCIATED ENTERPRISES AS IT IS COMPENSATED ON COST PLUS BASIS THE INDEPENDENT COMPANIES HAVE TO BEAR THE VAGARIES OF THE ECONOMIC AND BUSINESS FACTORS THAT ARE PREVAILING IN THE INDUSTRY AND THUS COULD EITHER INCUR LOSSES OR EARN PROFITS BASED ON MARKET CONDITIONS. 6. THE LEARNED COUNSEL FOR THE ASSESSEE DEALING WITH TH E WORKING CAPITAL ADJUSTMENTS FURTHER SUBMITTED THAT THERE EXIST DIFFERENCES IN THE ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLES OF COMPARABLE COM PANIES VIS-- VIS THE ASSESSEE AND SUBMITTED THAT APPROPRIATE ADJUSTME NT IS REQUIRED TO BE MADE TO FACTOR THE DIFFERENCE IN THE WORKING CAPITA L EMPLOYED TO IMPROVE THE RELIABILITY OF THE RESULTS. THE ADJUSTMENTS ENSURE THAT THE ABSOLUTE LEVELS OF THE RELEVANT BALANCE SHEET ITEMS ARE NORMALIZED BY MEASURING THEM AGAINST THE TOTAL COST. HE FURTHER SUBMITTED THAT WORK ING CAPITAL ADJUSTMENT IS THE MOST COMMON ADJUSTMENT APPLIES WORLDWIDE BY TAXPA YERS AND BY SEVERAL BUSINESS COMMENTATORS. ASSET INTENSITY OR BALANCE SHE ET ADJUSTMENTS ARE INTENDED TO ACCOUNT FOR THE FACT THAT T HE AMOUNT OF CAPITAL USED IN A BUSINESS AFFECTS ITS ECONOMIC PROFIT. INVITING OUR ATTENTION TO PAGES 168 TO 180 OF THE PAPER-BOOK NO.1 LEARNED COU NSEL FOR THE ASSESSEE SUBMITTED THAT ADJUSTMENTS TO REFLECT THE DIFFERING LEV ELS OF ACCOUNTS ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 6 RECEIVABLE AND ACCOUNT PAYABLE VIZ. WORKING CAPITAL AD JUSTMENTS BETWEEN THE TAX PAYER AND POTENTIAL COMPARABLES WERE ALSO MADE BY THE TRANSFER PRICING OFFICER IN THE SUBSEQUENT YEARS WHEN PERFORMING TRANSFER PRICING ANALYSIS. 7. REFERRING TO THE LETTER OF THE ASSESSEE DATED 11.12 .2009 THE LEARNED COUNSEL FOR THE ASSESSEE SUMMARIZED THE WORKINGS O F THE RISK ADJUSTMENTS UNDER VARIOUS METHODS AS FOLLOWS- (1) ADJUSTMENTS FOR THE DIFFERENCE IN THE WORKING CAPITAL IN ACCORDANCE WITH THE METHODOLOGY FOLLOWED BY THE TPO IN THE SUBSEQUENT FINANCIAL YEAR I.E. FINANCIAL YEAR 2004-05 TP ASSESSMENT = 2.63% (2) BUSINESS RISK ADJUSTMENT AS PER SHARPE RATIO = 2.69% AND (3) BUSINESS RISK ADJUSTMENT AS PER METHODOLOGY PRESCRIBED BY THE BANGALORE ITAT IN THE CASE OF PHILIPS SOFTWARE = 4.94 %. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE TP DOCUMENTATION MAINTAINED BY THE ASSESSEE NO RISK ADJUSTMENT WAS WARRANT ED SINCE AS PER THE COMPARABLES SELECTED THE INTERNATIONAL TRANSACTIONS W ERE WITHIN ARM'S LENGTH RANGE AND THE ASSESSEE'S REQUESTS DURING THE ASSESSMEN T AND APPELLATE PROCEEDINGS BEFORE THE CIT(A) FOR THE RISK ADJUSTMENTS IF WARRANTED WERE UNDULY REJECTED. 8. IN THIS VIEW OF THE MATTER LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT FROM A TRANSFER PRICING PERSPECTIVE IT W OULD BE NECESSARY TO MAKE ADJUSTMENTS FOR THE ENTREPRENEURIAL RISK BUSINE SS RISKS AND WORKING CAPITAL RISKS BORNE BY THE COMPARABLE COMPANIES VIS-A-V IS THE ASSESSEE SO AS TO MAKE THE COMPARISON BETWEEN THE MARGINS EARNED BY THE COMPARABLE ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 7 COMPANIES AND THE ASSESSEE ENTERPRISES AND AS A CONSEQUENCE T HE MARGINS EARNED BY THE ASSESSEE WOULD BE COMPARATIVELY LOWER TO R EFLECT THE LOWER LEVEL OF FUNCTIONS AND RISKS. INVITING OUR SPECIFIC ATT ENTION TO PAGES 323 TO 325 OF THE PAPER-BOOK HE SUBMITTED THAT ON THIS BASI S IF ANY OF THESE ADJUSTMENTS I.E. WORKING CAPITAL OR RISK IS PROVIDED; THE MARGIN OF THE ASSESSEE WOULD FALL WITHIN ARM'S LENGTH RANGE 9. IN SUPPORT OF THE ABOVE CONTENTIONS LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS- (A) E-GAIN COMMUNICATION (P) LTD. V/S. ITO (118 ITD 243) -PUNE (B) MENTOR GRAPHICS (P)LTD. V/S. DCIT (2007(109 ITD 101) (C) SONY INDIA PVT. LTD. V/S. DCIT AND VICE VERSA (114 ITD 448)-PUNE (D) PHILIPS SOFTWARE CENTRE P. LTD. V/S. ACIT(26 SOT 226) (E) DIAMOND DYE CHEM LTD. V/S. DCIT(2010 TII 20 ITAT MUM -TP) (F) QUARK SYSTEMS PVT. LTD. V/S. DCIT (2010 TII 31 ITAT MU M-TP) (G) ACIT V/S. FIAT INDIA PVT. LTD. (2010 TII 30 ITAT MUM -TP) (H) SCHEFENACKER MOTHERSON LTD. V/S. ITO (ITA NO.4459/DEL/0 7 & ITA NO.4460/DEL/07) (I) SKODA AUTO INDIA PVT. LTD. V/S. CIT (30 SOT 319)-PUN E (J) 10. HE ALSO QUESTIONED THE ACTION OF THE REVENUE AUTHO RITIES IN REJECTING THE COMPARABLE CASES TAKEN INTO ACCOUNT BY THE ASSESSEE AND INVITED OUR SPECIFIC ATTENTION IN THIS BEHALF TO PAGES 84 TO 125 OF PB WITH REGARD TO AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD.; PAGES 126 TO 152 O F PB WITH REGARD TO QUINTEGRA SOLUTIONS LIMITED AND SUBMITTED THAT IF ANY OF THE ABOVE COMPARABLES IS SELECTED THEN THE ASSESSEE'S MARGIN FALLS WITH IN THE ARM'S LENGTH PRICE EVEN WITHOUT CONSIDERING THE ADJUSTMENT O N ACCOUNT OF RISK OR ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 8 WORKING CAPITAL ADJUSTMENT AND CONSEQUENTLY THE ENTIRE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER AND PARTIALLY UPHELD B Y THE CIT(A) SHALL BE DELETED. 11. WITH REGARD TO USE OF MULTIPLE YEAR DATA LEAR NED COUNSEL FOR THE ASSESSEE PLACING RELIANCE ON RULE 10D(4) SUBMITTED THAT TRANSFER PRICING DOCUMENTATION SHOULD AS FAR AS POSSIBLE BE CONTEMPORANEOU S AND SHOULD EXIST LATEST BY THE DUE DATE FOR FILING OF INCOME TAX RETURN I.E. 31.10.2004 FOR THE ASSESSMENT YEAR 2004-05. SINCE ALL THE COMPANIE S DO NOT PUBLISH THE FINANCIAL YEAR RESULTS BY THE DUE DATE IT IS SUBMI TTED THAT USE OF FINANCIAL DATA ONLY FOR THE FINANCIAL YEAR 2003-04 IS PRACTICALLY NOT POSSIBLE AND AS SUCH IT IS SUBMITTED THAT USE OF MULTIPLE YEAR AND CONTEM PORANEOUS DATA AVAILABLE BY THE PRESCRIBED DATE SHOULD BE ALLOWED. HE FILED DETAILED WRITTEN SUBMISSION REITERATING AND ELABORATING THE AB OVE SUBMISSIONS. 12. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND OPPOSED THE ABOVE SUBMISSIONS OF THE ASSESSEE AND ON THE A BOVE ASPECTS ARISING OUT OF THE APPEAL OF THE ASSESSEE SUPPORTED THE ORDER OF THE CIT (A). STRONGLY SUPPORTING ACTION OF THE TRANSFER PRICING OF FICER IN REJECTING TEN OUT OF 14 COMPARABLE COMPANIES DOCUMENTED BY THE ASSESSEE SHE SUBMITTED THAT THE ASSESSEE ITSELF AGREED FOR THE REJECTION OF EIGH T COMPANIES AND THE ONLY DISPUTE BETWEEN THE ASSESSEE AND THE TRANSFER PRICIN G OFFICER WAS ONLY IN RESPECT OF REJECTION OF TWO COMPARABLE COMPANIES VIZ. AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. AND QUINTEGRA SOLUTIONS LTD. THE FIRST OF THESE COMPARABLES VIZ. AZTEC SOFTWARE & TECHNOLOGY SERVICES WA S REJECTED BY THE TRANSFER PRICING OFFICER SINCE IT HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS OF MORE THAN 25% OF SALES. SHE ALSO SUBMITTED THAT AS CORRE CTLY HELD BY THE TRANSFER PRICING OFFICER WHEN THE CONSOLIDATED RESULTS OF AZTEC SOFTWARE & TECHNOLOGY SERVICES AND ITS SUBSIDIARY COMPANIES ARE NOT COM PARABLE WITH ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 9 THE STAND-ALONE RESULTS OF THE ASSESSEE. EVEN WITH REGAR D TO QUINTEGRA SOLUTIONS LTD. SHE SUBMITTED THAT THE FINANCIAL RESULT S OF THIS COMPANY ARE FOR THE YEAR ENDING SEPTEMBER 2004 AND NOT MARCH 2 004 AS IN THE CASE OF THE ASSESSEE COMPANY. PLACING RELIANCE ON RULE 10B(4) SHE SUBMITTED THAT DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO WITH THE ONLY EXCEPTION BEING THAT DATA OF EARLIER TWO YEARS MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF THE TRANSFER PRICES IN RELATION TO THE TRANSACTIONS B EING COMPARED. SHE FURTHER SUBMITTED THAT SINCE THE ASSESSEE ITSELF HAS NOT PRO VIDED FOR ANY ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL RISK IN THE TRANSFER PRICING DOCUMENT THERE IS NO JUSTIFICATION FOR ALLOWING THE SAM E AT THE ASSESSMENT OR APPELLATE STAGES. SHE SUBMITTED THAT THERE IS NO TH UMB RULE TO PROVIDE FOR SUCH ADJUSTMENTS AND SUCH ALLOWANCE OF WORKING CAPIT AL RISKS WOULD DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE. SINCE T HE ASSESSEE HAS NOT BEEN ABLE TO MAKE OUT ANY CASE FOR SUCH ADJUSTMENT THE TRANSFER PRICING OFFICER ACCORDING TO HER WAS JUSTIFIED IN NOT AL LOWING THE SAME. SHE HOWEVER SUBMITTED THAT THE CIT (A) WAS NOT JUSTIFIED IN ALLOWING BENEFIT OF 5% IN TERMS OF SECTION 92C(2) OF THE ACT. SHE SUBMITT ED THE CASE OF THE ASSESSEE IS NOT COMPARABLE AND THE DECISIONS RELIED ON BY TH E LEARNED CIT (A) ARE DISTINGUISHABLE AND IN ANY EVENT THEY ARE N OT JURISDICTIONAL AND BINDING. 13. LEARNED COUNSEL FOR THE ASSESSEE IN HIS REPLY AND IN THE CONTEXT OF THE GRIEVANCE OF THE REVENUE IN ITS APPEAL STRONGL Y SUPPORTED THE ORDER OF THE CIT (A) INSOFAR AS ALLOWANCE OF 5% MARGIN IS CON CERNED. HE SUBMITTED THAT AS PER PROVISO TO SECTION 92C(2) OF THE ACT AN ASSESSEE HAS THE OPTION OF CHARGING A PRICE TO ITS ASSOCIATED ENTERPRI SES WHICH MAY VARY ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 10 FROM THE ARM'S LENGTH PRICE BY PLUS OR MINUS 5%. ACCORD ING TO SECTION 92C(3) OF THE ACT HE SUBMITTED THAT THE ARM'S LENGTH PRICE SHALL BE DETERMINED BY THE ASSESSING OFFICER IN ACCORDANCE WITH SUB-SE CTION (1) AND (2) OF SECTION 92C AND THEREFORE IT SHOULD BE APPRECI ATED THAT THE ASSESSING OFFICER/TRANSFER PRICING OFFICER IS MANDATORILY REQUIRED TO CALCULATE THE ARM'S LENGTH PRICE IN ACCORDANCE WITH S.92C(1) AND 92C(2) OF THE ACT. IN SUPPORT OF THESE CONTENTIONS RELIANCE IS ALSO PLACED ON THE EXPL ANATORY MEMORANDUM TO FINANCE BILL 2001 AND THE CLARIFICATIO NS CONTAINED IN NOTES ON CLAUSES- INCOME TAX (FINANCE BILL 2002). LEARNED COUNSEL FOR THE ASSESSEE JUSTIFIED +/-5% ADJUSTMENT INVITING OUR ATTENT ION TO RELEVANT PORTIONS OF THE CBDT CIRCULARS NO.12/2001 DATED 23.8.2 001 AND NO.05/2010 DATED 3.6.2010 AND ALSO PLACING RELIANCE ON THE FOLL OWING JUDICIAL PRONOUNCEMENTS COPIES OF WHICH ARE ALSO FURNISHED IN TH E PAPER-BOOK- (A) SKODA AUTO INDIA P.LTD. V/S. ACIT(122 TTJ 699)-PUNE (B) TOSHIBA INDIA PVT. LTD. (2010 TII-14-ITAT-DEL-TP) (C) EELCTROBUG TECHNOLOGIES LTD.(2010 TII-39-ITAT-DEL-TP) (D) SCHEFENACKER MOTHERSON LTD.(123 TTJ 509)-DEL. (E) SAP LABS (ITA NO.398 & 418/BANG/2008) 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES. WE HAVE CAREFULLY EX AMINED THE WRITTEN SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE BESIDES V OLUMINOUS PAPER-BOOKS FILED BY THE LEARNED COUNSEL FOR THE ASSESSEE AND OTHER MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE CA SE-LAW RELIED UPON BY THE PARTIES. FIRST WE MAY TAKE UP THE APPEAL OF THE ASSESSEE WHEREIN THE FIRST GRIEVANCE OF THE ASSESSEE IS THAT THE TPO SHOULD HAVE PROVIDED WORKING CAPITAL RISK ADJUSTMENT AND OTHER ADJUSTMENTS IN ACCORD ANCE WITH RULE 10B(1)(E) WHILE ARRIVING AT THE ALP. WE FIND TH AT AS PER THE REPORT OF THE TPO AT PAGE NO.19 OF HIS ORDER THAT THE COMPARABLES WERE ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 11 SELECTED BY THE ASSESSEE AFTER UNDERTAKING FAR ANALYSIS O F THE CONTROLLED AND UNCONTROLLED PARTIES AND THE TRANSACTIONS ARE IN TER MS OF SIMILARITIES. THE ASSESSEE HAS NOT QUANTIFIED OR IDENTIFIED ANY DIFFER ENCES WHILE UNDERTAKING THE FAR ANALYSIS IN THE TRANSFER PRICE DOCUM ENTATION AND NO ADJUSTMENT WAS MADE ON THAT COUNT. HENCE AT THIS STAGE THE ASSESSEE CANNOT TAKE ANY PLEA IN THAT REGARD. SINCE THE ASSESSE E ITSELF HAS NOT MADE ANY SUCH ADJUSTMENT THE CASE-LAW RELIED UPON BY TH E ASSESSEE IN THIS BEHALF IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CA SE. RISK ADJUSTMENTS CAN BE GIVEN ONLY ON COMPANY TO COMPANY BASIS CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE. IN THE CIRCUMSTANCES W E AGREE WITH THE CIT (A) THAT THERE IS NO THUMB RULE FOR ALLOWING SUCH RISK ADJUSTMENT. THE OTHER CONTENTION OF THE ASSESSEE IS WITH REGARD TO TH E REJECTION OF THE COMPARABLE COMPANIES SATISFYING ALL THE FILTERS ADOPTED B Y THE TPO. ON THIS ISSUE THE CIT(A) CLEARLY OBSERVED IN HIS ORDER THAT OUT OF FOURTEEN COMPARABLE COMPANIES SELECTED BY THE ASSESSEE ONLY FOUR COMP ANIES WERE SELECTED BY THE TPO. THE ASSESSEE AGREED WITH THE TPO FO R REJECTION OF EIGHT COMPANIES AND THE OTHER COMPANIES AVAILABLE WERE ONLY TWO COMPANIES. THAT IS ONE AZTEC SOFTWARE AND THE OTHER ON E IS QUINTEGRA SOLUTIONS LTD. THESE COMPANIES WERE REJECTED BY THE T PO FOR THE REASON THAT IT HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS WHI CH WORK OUT TO MORE THAN 25% OF THE TOTAL SALES. HENCE THE FINDINGS GIVEN B Y THE CIT (A) IN REJECTING THESE TWO COMPANIES AS NOT COMPARABLE IN OUR CONSIDERED OPINION ARE IN ORDER. ONE OTHER CONTENTION OF THE ASSESSEE RELAT ES TO USE OF MULTIPLE YEAR AND CONTEMPORANEOUS DATA AVAILABLE BY THE PRESCRIB ED DATA. AS PER RULE 10 B (4) DATA TO BE USED IN ANALYZING THE COMPA RABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTI ON SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATI ONAL TRANSACTION HAS BEEN ENTERED INTO WITH THE ONLY EXCEPTION BEING THAT DAT A OF EARLIER TWO YEARS MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 12 INFLUENCE ON THE DETERMINATION OF THE TRANSFER PRICES I N RELATION TO THE TRANSACTIONS BEING COMPARED. IN VIEW OF THE ABOVE THE CIT (A) IS RIGHT IN HOLDING THAT THE DATA OF THE SUBSEQUENT PERIOD CANNOT BE CONSIDERED FOR COMPARISON. ACCORDINGLY ASSESSEES GROUNDS ON THESE ASPECTS OF T HE MATTER ARE REJECTED. 15. THE NEXT GRIEVANCE OF THE ASSESSEE IN ITS APPEAL I S THAT THE CIT (A) WAS NOT JUSTIFIED IN CONFIRMING THAT THE DATA LINK CHARGES ARE COMPLETELY ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUT SIDE INDIA FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. RELATED GRIEVANCE OF THE REVENUE IN ITS APPEAL ON THIS ISSUE IS THAT THE CIT (A) ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXPENSES U NDER COMMUNICATION CHARGES FROM THE TOTAL TURNOVER SIMILAR T O EXPORT TURNOVER WHILE COMPUTING THE EXEMPTION UNDER SECTION 10A OF TH E ACT. IT IS THE CASE OF THE REVENUE THAT THE CIT (A) WAS NOT CORRECTING IN MERGING THE CONDITIONS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 10A AND 80HHC OF THE ACT SINCE THEY ARE INDEPENDENT OF EACH OTHER AND THE PROVISION S OF SECTION 80HHC ARE NOT APPLICABLE TO SECTION 10A OF THE ACT. 16. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONG LY RELYING ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE CI T (A) WAS NOT CORRECT IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXPENSES U NDER COMMUNICATION CHARGES FROM THE TOTAL TURNOVER. 17. THE LEARNED COUNSEL FOR THE ASSESSEE BESIDES OPPOSI NG THE ABOVE CONTENTIONS OF THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUBMITTED THAT THE ASSESSEE DEVELOPS COMPUTER SOFTWARE IN SYNCHRONIZ ATION WITH OTHER DEVELOPMENT TEAMS ACROSS THE GLOBE AND REQUIRES TO BE N ETWORKED WITH THE OTHER TEAMS ON A CONTINUOUS BASIS. IN THIS PROCESS THE ASSESSE E HAS ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 13 OBTAINED DATA LINKS SERVICE FROM SERVICE PROVIDERS. THOU GH THE SOFTWARE DEVELOPED BY THE ASSESSEE IS DELIVERED THROUGH THE DATA LINKS IN INDIA THE ASSESSEE HAS NEITHER INCURRED ANY EXPENSES SPECIFICALLY FOR DA TA LINK CHARGES TOWARDS THE DELIVERY OF THE COMPUTER SOFTWARE OUTSIDE I NDIA NOR HAS IT CHARGED ANY CLIENTS TOWARDS DELIVERY OF COMPUTER SOFTWARE . ACCORDING TO HIM THE ABOVE CHARGES ARE LARGELY INCURRED FOR INTER OFFICE AND INTRA OFFICE COMMUNICATION AS THE NATURE OF BUSINESS OF THE ASSESSEE I S SUCH THAT IT REQUIRES SUBSTANTIAL INTERACTION BETWEEN THE PERSONNEL O F THE ASSESSEE AND PERSONNEL OF OTHER ENTITIES ACROSS THE GLOBE IN ADDITION TO BEING MARGINALLY INCURRED FOR EXPORT/DELIVERY OF COMPUTER SOFTWARE OUTSI DE INDIA. AS SUCH THE CIT (A) ACCORDING TO HIM WAS NOT JUSTIFIED IN HOLD ING THAT DATA LINK CHARGES ARE COMPLETELY ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. PLACING RELIANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN ITO V/S. SAK SOFT LTD. (30 SOT 55) AND T HE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2003-04 WHEREIN IT HAS BEEN HELD THAT IF DATA LINK CHARGES ARE REDUCED FROM EXPORT TURNOVER THEN THE SAME SHOULD ALSO BE RED UCED FROM TOTAL TURNOVER. IN ANY EVENT IT IS CONTENDED THAT THERE IS NO REVENUE IMPACT AS 100% PROFITS OF THE ASSESSEE COME FROM EXPORT BUSINESS AND AS SUCH THE ASSESSEE IS NOT INTERESTED IN PRESSING ITS GROUND ON THIS ISS UE. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. AT THE OUTSET WE MA Y REJECT THE GROUND OF THE ASSESSEE ON THIS ISSUE SINCE AS NOTED ABOVE IT IS CONTEN DED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THOUGH THE VIEW TAK EN BY THE CIT (A) THAT ENTIRE DATA LINK CHARGES ARE ATTRIBUTABLE TO DEL IVERY OF COMPUTER SOFTWARE OUTSIDE INDIA IS NOT ACCEPTABLE HE IS NOT PRESSIN G THIS GROUND SINCE IT IS DOES NOT HAVE ULTIMATELY ANY REVENUE IMPACT AND AS SUCH IT IS ONLY OF ACADEMIC INTEREST. AS FOR THE GROUNDS OF THE REVENUE I N ITS APPEAL ON THIS ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 14 ISSUE WE FIND THAT THE DECISION OF THE CIT (A) IN DIRE CTING ASSESSING OFFICER TO EXCLUDE THE DATA LINK CHARGES FORM THE TOTAL TURNOV ER HAVING EXCLUDED THE SAME FROM EXPORT TURNOVER IS BASED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 200 3-04 IN ITA NO.579/HYD/2007. FURTHER WE FIND THAT IN THE RECENT DECISION OF THE SPECIAL BENCH (CHENNAI) OF THE TRIBUNAL IN THE CASE OF SAK SOF T LTD. (SUPRA) IT HAS BEEN HELD THAT IF DATA LINK CHARGES ARE REDUCED FROM E XPORT TURNOVER THEN THE SAME SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL WE FIND NO INFIRMITY IN THE ORDER OF THE CIT (A) ON THIS ISSUE. WE ACCORDINGLY CONFIRM THE VIEW TAKEN BY THE CIT (A). IN THIS VIEW OF THE MATTER WE REJECT THE RESPECTIVE GROUNDS OF THE ASSESSEE AS WELL AS THE REVENUE ON THIS ISSUE . 19. NOW WE WILL TAKE UP THE ISSUE IN REVENUES APPE AL WHETHER THE ASSESSEE COMPANY IS ENTITLED TO THE ADJUSTMENT OF 5% AS STI PULATED UNDER SECTION 92C [1] OF THE ACT. THE UNDISPUTED FACT IN THE CASE UNDER CONSIDERATION IS THAT ONLY ONE METHOD CALLED TNMM WAS A PPLIED TO FIND OUT THE ALP PRICE. IN OUR CONSIDERED OPINION WHERE THE ALP HAS BEEN DETERMINED BY APPLYING ONLY ONE OUT OF THE SEVERAL M ETHODS SPECIFIED UNDER SECTION 92C(1) OF THE ACT THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION OF 5% ADJUSTMENT FROM THE ALP AS STIPULATED UNDER SECTION 92C (2) OF THE ACT. IN OTHER WORDS SECTION 92C (2) OF THE ACT SPECIFIES THAT THE ADJUSTMENT OF 5% IS NOT APPLICABLE IF A SINGLE PRICE IS DETERMINED BY THE ASSESSEE. OUR VIEW IS FORTIFIED BY THE DECISION OF THE DELHI BENCH OF THE TR IBUNAL IN THE CASE OF PEROT SYSTEMS TSI [INDIA] LTD. [ 5 ITR 106 ] AND THE DECISIONS RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE INCLUDING THAT OF SON Y [INDIA] PVT. LTD. (SUPRA) DOES NOT APPLY TO THE FACTS OF THE INSTANT CASE . EVEN THE CIRCULAR NO.12 DATED 23-08.2001 ISSUED BY THE CBDT DOES NOT APP LY TO THE CASE UNDER CONSIDERATION AS THE PRICE VARIATION IS MORE THAN 5% AND SAID CIRCULAR ITA NO.106 AND 155/HYD/09 M/S. ADP PRIVATE LIMITED HYD. 15 IS APPLICABLE ONLY IF THE VARIATION IN PRICE WITH THE ASSOCIATED ENTERPRISE VIS- -VIS THE UNRELATED PARTY IS WITHIN THE LIMIT OF [+] OR [-] 5%. IN VIEW OF THE ABOVE WE HOLD THAT THE CIT (A) IS NOT JUSTIFIED IN A LLOWING 5% ADJUSTMENT IN TERMS OF SECTION 92C (1) OF THE ACT. WE ACCORDINGLY SET ASIDE THE ORDER OF THE CIT (A) ON THIS ASPECT ALLOWING THE GROUND RAISED BY THE REVENUE. 20. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE AS W ELL AS REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 25.2.2011 SD/- SD/- (G.C.GUPTA) (CHANDRA POOJARI) VICE PRESIDENT ACCOUNTANT MEMBER DT/- 25 TH FEBRUARY 2011 COPY FORWARDED TO: 1. M/S. ADP INDIA PRIVATE LIMITED 6-3-1-01/C/1. FO RTUNE 9 RAJ BHAVAN ROAD SOMAJIGUDA HYDERABAD 500 082. 2. DY. COMMISSIONER OF INCOME-TAX CIRCLE 1(1) HYDERA BAD 3. CIT(A) III HYDERABAD 4. COMMISSIONER OF INCOME-TAX-II HYDERABAD 5. THE DEPARTMENTAL REPRESENTATIVE ITAT HYDERABAD. B.V.S .