M/s. SAP Labs India Pvt. Ltd.,, Bangalore v. The Asst. Commissioner of Income - Tax, Bangalore

MA 102/BANG/2010 | 2003-2004
Pronouncement Date: 09-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 10221124 RSA 2010
Assessee PAN AAFCS3649P
Bench Bangalore
Appeal Number MA 102/BANG/2010
Duration Of Justice 1 year(s) 5 day(s)
Appellant M/s. SAP Labs India Pvt. Ltd.,, Bangalore
Respondent The Asst. Commissioner of Income - Tax, Bangalore
Appeal Type Miscellaneous Application
Pronouncement Date 09-11-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 09-11-2011
Date Of Final Hearing 14-10-2011
Next Hearing Date 14-10-2011
Assessment Year 2003-2004
Appeal Filed On 04-11-2010
Judgment Text
PAGE 1 OF 15 M.P. NO.102/BANG/20 10 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N K SAINI ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K JUDICIAL MEMBER M.P.NO.102/BANG/2010 (IN ITA NOS. 398 & 418/BANG/2008) (ASST. YEAR 2003-04) M/S SAP LABS INDIA PVT. LTD. NO.138 EXPORT PROMOTION INDL. PARK WHITE FIELD BANGALORE-66. - APPELLANT/PETITIONE R PA NO.AAFCS 3649P VS THE ASST. COMMISSIONER OF INCOME-TAX CIRCLE-12(3) BANGALORE. - RESPONDENT DATE OF HEARING : 14/10/2011 DATE OF PRONOUNCEMENT : 09/11/2011 APPELLANT BY : SHRI RAJAN VORA C.A. RESPONDENT BY : SHRI ETWA MUNDA CIT-III O R D E R PER GEORGE GEORGE K : THIS MISCELLANEOUS APPLICATION FILED BY THE ASSESS EE ARISE OUT OF THE TRIBUNAL ORDER DATED 30 TH AUGUST 2010 IN ITA NOS.398 & 418/BANG/2008. 2. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY INCORPORATED IN INDIA ON AUGUST 7 1995 AND IS A WHOLLY OWNED SUBSIDIARY OF SAP AG GER MANY. SAP LABS HAS PAGE 2 OF 15 M.P. NO.102/BANG/20 10 2 ENTERED INTO A RESEARCH & DEVELOPMENT AGREEMENT (R& D AGREEMENT) WITH SAP AG AND IS REMUNERATED ON A COST PLUS 6% BASIS O R 1.5 TIMES THE WAGE BILL WHICHEVER IS HIGHER. THE ASSESSEE CONDUCTED A TRANSFER PRICING (TP) STUDY TO SUBSTANTIATE THAT ITS INTERNATIONAL TRANSAC TIONS DURING THE AY 2003-04 WERE AT ARMS LENGTH BASED ON THE FUNCTION S ASSETS AND RISKS ANALYSIS OF THE ASSESSEES BUSINESS AND ADOPTING TRA NSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE ARMS LENGTH PR ICE (ALP). 2.1 THE AO PASSED AN ASSESSMENT ORDER U/S 143(3) O F THE ACT WITH THE FOLLOWING ADJUSTMENTS:- DISALLOWANCE OF COMPENSATION CHARGES ON TERMINATION OF LEASE AGREEMENT; AND TP ADJUSTMENT OF RS.11 42 86 466/- [AS PROPOSED BY T HE TPO) IN HIS ORDER DATED MARCH 15 2006 PURSUANT TO A REFERENCE OF THE ASSESSEES CASE BY THE AO] 3. ON APPEAL THE ADJUSTMENT TO THE ALP MADE BY TH E AO U/S 92CA WAS CONFIRMED BY THE CIT(A) VIDE ORDER DATED JA NUARY 28 2008. 4. BEING AGGRIEVED BY THE ORDER OF THE CIT(A) ASSE SSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL. THE TRIBU NAL PASSED AN ORDER U/S 254(1) OF THE ACT DATED 30/8/2010. THE TRIBUNAL IN THE ORDER HAS ADJUDICATED ON CERTAIN ECONOMIC AND LEGAL ISSUES RE GARDING THE DETERMINATION OF ALP IN RESPECT OF TRANSACTIONS ENTERED INTO BY TH E ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE). THE TRIBUNAL BASED O N A DETAILED ANALYSIS OF THE ASSESSEES AND THE TPOS APPROACH TO SELECTION OF COMPARABLE DATA DETERMINED THE ALP MARGIN FOR THE TRANSACTION AT 20 .57% AND RE-WORKED THE ASSESSEES MARGIN AT 8.80%. FURTHER A STANDAR D DEDUCTION OF 5% ON THE PAGE 3 OF 15 M.P. NO.102/BANG/20 10 3 ASSESSEES MARGIN HAS BEEN GRANTED UNDER PROVISO TO SECTION 92C(2) OF THE ACT THEREBY INCREASING THE ASSESSEES MARGIN TO 13. 8%. ACCORDINGLY THE TP ADJUSTMENT HAS BEEN REDUCED FROM 16.81% (AS DETERMI NED BY THE TPO) TO 6.77% OF THE OPERATING COSTS OF THE ASSESSEE. 5. THE ASSESSEE COMPANY BEING AGGRIEVED BY CERTAIN FINDINGS/CONCLUSIONS OF THE TRIBUNAL HAS FILED THI S MISCELLANEOUS APPLICATION BEFORE US. 6. IN THE MISCELLANEOUS APPLICATION THE ASSESSEE HAS RAISED FOUR ISSUES NAMELY (I) SATYAM COMPUTERS SERVICES LIMITED SHOULD NOT BE ACCEPTED AS A COMPARABLE; (II) REJECTION OF COMPARABLE COMPANIES WITH MARGIN S LESS THAN 6% (INCLUDING COMPARABLE COMPANIES WITH NEGATI VE MARGINS); (III) REQUEST FOR RISK ADJUSTMENT AND (IV) COMPUTATION OF THE ARMS LENGTH RANGE. 7. NOW LET US TAKE UP EACH ISSUE SEPARATELY. (1) SATYAM COMPUTERS SERVICES LIMITED SHOULD NOT BE ACCEPTED AS A COMPARABLE (PAGE NOS.67-69 PARA NOS.91-93 IN THE ORDER THE TRIBUNAL HAS WORKED OUT THE ALP /THE ARITHMETICAL MEAN OF THE COMPARABLES SHORTLISTED OU T OF THE COMPARABLES IDENTIFIED BY THE TPO/ASSESSEE AS FOLLOWS:- THE ARITHMETIC MEAN WILL BE WORKED OUT ON THE BASI S OF COMBINED LIST OF BOTH TPO/AO AND THE ASSESSEE COMPA NY COMPRISING 12 COMPARABLES. PAGE 4 OF 15 M.P. NO.102/BANG/20 10 4 THE NECESSARY WORKING IS MADE OUT BELOW: S. NO NAME OF THE COMPANY MARGINS (IN %) 1. ADCC RESEARCH & COMPUTING CENTRE LTD. 40.96 2. COMPUDYNE WINFO SYSTEMS LTD. 21.65 3. KASHYAP RADIANT SYSTEMS LTD. 13.27 4. LANCO GLOBAL SYSTEMS 20.91 5. LARSEN & TURBO INFOTECH LTD. 6.95 6. MASCON GLOBAL LTD. 10.26 7. ONWARD TECHNOLOGIES LTD. 15.45 8. SATYAM COMPUTERS SERVICES LTD. 30.86 9. VMF SOFTTECH LTD. 6.09 10. XCEL VISION TECHNOLOGIES LTD. 35.88 11. KSHEMA TECHNOLOGIES LTD. 13.64 12. ZYLOG SYSTEMS LTD. 30.86 TOTAL VALU E 246.78 NO. OF COMPARABLES 12 ARITHMETIC MEAN 20.57 AS COMPUTED ABOVE THE ARITHMETIC MEAN TO WORK OUT THE ALP IS 20.57% (PAGE NO.67-69 PARA NO.91-93) 7.1 IN THE COURSE OF HEARING OF THE M.P. IT WAS S UBMITTED THAT THOUGH SATYAM IS ENGAGED IN SOFTWARE DEVELOPMENT AND QUALIFIES ALL THE COMPARABILITY FILTERS THE SAME SHOULD NOT TO BE CON SIDERED AS A COMPARABLE DUE TO RECENT DEVELOPMENTS HIGHLIGHTING THE UNRELIA BILITY AND FALSIFICATION OF ITS AUDITED FINANCIAL STATEMENTS. IT WAS SUBMITTED THAT IN THE COURSE OF HEARING OF THE APPEAL ON 19.5.2010 IT SPECIFICALLY PLEADED THAT SATYAM SHOULD NOT BE INCLUDED AS A COMPARABLE. THE UNRELI ABILITY OF THE ACCOUNTS HAS ALSO BEEN ADMITTED BY THE MANAGING DIRECTOR OF S ATYAM IN HIS COMMUNICATION TO THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) THE AUTHORITY FOR REGULATING THE CAPITAL MARKETS IN RESP ECT OF LISTED COMPANIES IN INDIA. THEREFORE IT WAS SUBMITTED THAT HAVING KN OWN THE TRUE STATE OF PAGE 5 OF 15 M.P. NO.102/BANG/20 10 5 AFFAIRS OF SATYAM AS ON THE DATE OF PRONOUNCEMENT OF THE ORDER OF THE TRIBUNAL I.E. 30 TH AUGUST 2010 THE ASSESSEE PLEADS THAT SATYAM SHOUL D NOT BE INCLUDED IN THE COMPARABLES SET FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSE E DURING THE FINANCIAL YEAR 2002-03. 7.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. WE NOTICED THAT THE ASSESSEE COMPANY SEL ECTED 22 COMPARABLES IN THE TRANSFER PRICING DOCUMENT AND M/S SATYAM COMP UTERS SERVICES LTD. WAS LISTED AT SL. NO.18 (SOURCE PAGE 54 OF ANNEXURE A-6 OF PAPER BOOK VOL.I). THE TPO VIDE HIS ORDER DATED 15.3.2006 SELE CTED 8 COMPARABLES AND EXCLUDED SATYAM COMPUTERS SERVICES LTD. SELECTED BY T HE ASSESSEE. THE EXCLUSION OF SATYAM BY THE TPO WAS FOR THE REASON THA T HE DETERMINED A TURNOVER FILTER OF RS.50 CRORES TO RS.150 CRORES WO ULD ENSURE COMPARABILITY OF THE COMPANIES WITH THE ASSESSEE. CONSEQUENTLY S ATYAM WHICH REPORTED A TURNOVER OF RS.2023.65 CRORES WAS EXCLUDED FROM T HE LISTS OF COMPARABLE COMPANIES AS IT DID NOT FALL WITHIN THE ABOVE TURNO VER RANGE. THE ABOVE SELECTION CRITERION ADOPTED BY THE TPO WAS UPHELD BY THE CIT(A) VIDE ORDER DATED 28 TH JANUARY 2008 DISREGARDING THE SUBMISSIONS MADE BY THE ASSESSEE THAT THE TURNOVER FILTER ADOPTED BY THE TPO SHOULD NOT BE USED IN IDENTIFYING COMPARABLE COMPANIES. THE TRIBUNAL IN T HE PROCESS OF ARRIVING AT THE FINAL LIST OF COMPARABLE COMPANIES FOR DETERMIN ING THE ALP COMBINED THE SEPARATE LISTS PREPARED BY TPO/CIT(A) AND THE AS SESSEE AND FINALLY DETERMINED 12 COMPANIES IN ALL INCLUDING SATYAM WH ICH WAS PICKED FROM AND FORMED PART OF THE ASSESSEES SET IN ITS ORIGINAL T RANSFER PRICING STUDY UNDERTAKEN IN 2003. PAGE 6 OF 15 M.P. NO.102/BANG/20 10 6 7.2.1. IN THIS REGARD WE HAVE TO MENTION THAT SA TYAM WAS ALREADY EXCLUDED IN THE LISTS OF COMPARABLE COMPANIES BY THE TPO AS WELL AS BY THE CIT(A) THEREFORE NEITHER GROUND NOR WRITTEN SUBMI SSION COULD HAVE BEEN RAISED FOR ITS EXCLUSION BEFORE THE TRIBUNAL. THE ASSESSEES GROUND/PRAYER BEFORE THE TRIBUNAL WAS THAT ADOPTION OF TURNOVER F ILTER BY THE TPO TO IDENTIFY THE NEW LIST OF COMPARABLE COMPANIES IS NOT JUSTIFIED. IT WAS SUBMITTED BY THE LEARNED AR THAT DURING THE COURSE O F HEARING OF APPEAL IT WAS SPECIFICALLY PLEADED THAT SATYAM SHOULD NOT BE IN CLUDED IN THE COMPARABLES LIST IN THE EVENT THE ASSESSEES GROUND /PRAYER TO REJECT TPOS IDENTIFICATION OF COMPARABLES ON THE BASIS OF TURNO VER FILER IS NOT ACCEDED TO. IN THIS REGARD IT WAS SUBMITTED THAT THE EXT RACT FROM SATYAMS MANAGING DIRECTORS COMMUNICATION TO THE SECURITIES AND EXCHANGE BOARD OF INDIA WAS READ OUT BY THE AUTHORIZED REPRESENTATIVE S OF THE ASSESSEE DURING THE HEARING OF APPEAL ON 19 TH MAY 2010. IT IS AN ADMITTED POSITION THAT SATYAM COMPANYS STATEMENTS OF AFFAIRS WERE FALSIFIED DURING THE PERIOD 2002 TO 2008 AND IT BECAME PUBLICLY KNOWN IN JANUARY 2009. WHEN A RESPONSIBLE AND RESPECTABLE COUNSEL SUBMITS BEFORE THE BENCH THAT HE HAD PLEADED DURING THE COURSE OF HEARING OF THE APPEAL THAT SATYAM SHOULD NOT BE TAKEN AS A COMPARABLE WE SEE NO REASON TO DOUBT THE AUTHENTICITY OF HIS STATEMENT. 7.2.2. MOREOVER VARIOUS TRIBUNALS HAVE TAKEN NOTE OF THE FACT THAT SATYAM CANNOT BE ACCEPTED AS A COMPARABLE. FOR INST ANCE IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA NO.3856/DEL /2010) THE TRIBUNAL AGREED TO THE CONCLUSION OF THE DISPUTE RESOLUTION PANEL FOR EXCLUSION OF SATYAM ON THE GROUND THAT IT WAS PUBLICLY KNOWN THAT ITS FINANCIAL PAGE 7 OF 15 M.P. NO.102/BANG/20 10 7 STATEMENTS WERE NOT RELIABLE. FOR THE ABOVE SAID R EASONS WE DIRECT THAT SATYAM COMPUTERS SERVICES LTD. SHOULD NOT BE TAKEN A S A COMPARABLE COMPANY TO ARRIVE AT THE ALP. HENCE THIS PLEA OF T HE ASSESSEE IS ALLOWED. 8. REJECTION OF COMPARABLE COMPANIES WITH MARGINS LESS THAN 6% (INCLUDING COMPARABLE COMPANIES WITH NEGATIVE MAR GINS) IN ARRIVING AT THE SET OF COMPARABLE COMPANIES T HE TRIBUNAL HAS SHORTLISTED COMPARABLES OUT OF THOSE IDENTIFIED BY THE TPO/ASSESSEE IN THE FOLLOWING MANNER:- AT THE COST OF REPETITION WE HAVE TO SAY THAT EXTR EME CASES SHOULD NOT BE INCLUDED IN SAMPLES AND EXTREME COMPARABLES MEAN NOT ONLY THE POSITIVE HIGHER SIDE BUT ALSO THE LOWER SIDE. IN THE LIST OF 22 COMPARABLE S MANY OF THEM ARE HAVING VERY LOW MARGIN RATE NOT ONLY LES S THAN 10 OR 5 EVEN BELOW THAT. WE HAVE ALREADY CONSIDERED THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS GERMAN ASSOCIATE CONCERN HAS CONTEMPLATED A COMPENSATION OF COST PLUS 6% OR 1.5 TIMES OF THE TOTAL WAGES BILL WHICHEVER IS HIGHER. THIS POINT WE HAVE TO CONSIDER IN THE LIGHT OF THE FACT THAT THE ASSESSEE IS WORKING IN A RISK MITIGATED ENVIRONMENT . THAT IS WHY WE HAVE AGREED WITH THE ARGUMENT OF THE ASSES SEE COMPANY THAT THERE MAY NOT BE EXTREME PROFITS IN THE CASE OF THE ASSESSEE. WHEN EXTREMES ARE EXCLUDED F ROM THE SAMPLES ALL SORTS OF EXTREMES SHOULD BE AVOIDE D. OTHERWISE SAMPLES SELECTED FOR COMPARATIVE STUDY MA Y NOT BE REPRESENTATIVE. THEREFORE WE ARE INCLINED TO EXCLUDE THOSE COMPARABLES HAVING VERY LOW MARGIN. TH EN WHAT SHOULD BE THE CUT OF RATE? THE ASSESSEE HAS AGREED FOR A WORKING CONTRACT OF COST + 6%. THEREF ORE AS A REASONABLE PROFIT LEVEL INDICATOR (PLI) WE HO LD THAT ALL THE COMPARABLES HAVING MARGIN LESS THAN 6% HA VE TO BE EXCLUDED FROM THE LIST RELIED ON BY THE ASSESSEE. PAGE 8 OF 15 M.P. NO.102/BANG/20 10 8 ACCORDINGLY THE FOLLOWING COMPARABLES ARE EXCLUDED FROM THE ASSESSEES LIST: SL. NO . NAME OF THE COMPANY MARGINS (IN %) 1. BANGALORE SOFTSELL LTD. 2.27 2. CHERRY SOFT TECHNOLOGIES LTD. 3.67 3. GOLDSTONE TECHNOLOGIES LTD. 5.37 4.. MASCOT SYSTEMS 5.59 5. UNITECH INFO SOLUTIONS LTD. 5.52 6. VJIL CONSULTING LTD. 5.51 WE HAVE SO FAR EXCLUDED TWO COMPARABLES OF NEGATIVE MARGIN AND SIX COMPARABLES OF VERY LOW MARGIN TOTAL ING TO EIGHT. (PAGE NOS.63-65 PARA NOS.85 86) 8.2 THE LEARNED COUNSEL FOR THE ASSESSEE IN THE COURSE OF HEARING OF M.P. SUBMITTED THAT THE METHODOLOGY ADOPTED BY TH E TRIBUNAL WOULD ALWAYS RESULT IN THE ARITHMETICAL MEAN OF THE ARMS LENGTH MARGINS OF THE COMPARABLE COMPANIES TO BE HIGHER THAN 6% THEREBY R ESULTING IN AN UPWARD ALP ADJUSTMENT IN EVERY SCENARIO. BASED ON SUCH AN INFERENCE THE PRICE OF THE TAX PAYERS INTERNATIONAL TRANSACTIONS WOULD NEV ER BE CONSIDERED TO BE AT ARMS LENGTH. ALTERNATIVELY IT WAS ARGUED THAT IF 6 % IS TO BE TAKEN AS THE CUT-OFF RATE AND ALL COMPARABLES HAVING MARGINS L ESS THAN 6% ARE REGARDED AS EXTREME CASES THEN ALL COMPARABLES HAVING MARGI NS MORE THAN 6% SHOULD ALSO BE EXCLUDED ON THE SAME FOOTING THAT THERE AR E NO EXTREMITIES (ON THE HIGHER AND LOWER SIDE) SINCE THE ASSESSEE IS WORKIN G UNDER A RISK MITIGATED ENVIRONMENT. 8.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THIS ISSUE NOW RAISED BY THE LEARNED COU NSEL FOR THE ASSESSEE HAS BEEN ELABORATELY DEALT WITH BY THE TRIBUNAL FROM PAGE S 55 TO 57 OF THE PAGE 9 OF 15 M.P. NO.102/BANG/20 10 9 IMPUGNED ORDER. THE TRIBUNAL WAS OF VIEW THAT EXTRE ME CASES SHOULD NOT BE INCLUDED AS COMPARABLES. EXTREME COMPARABLES OF PO SITIVE HIGHER AND ALSO LOWER SIDE SHOULD BE EXCLUDED. FROM THE SAME IT CA N BE SEEN THAT THE COMPARABLES SELECTED BY THE TPO/AO THE PROFIT MARGI NS RANGING BETWEEN 22.75 TO 111.45 HAD BEEN DIRECTED TO BE EXCLUDED BY THE TRIBUNAL FROM THE LIST OF THE COMPARABLES. THE REASON FOR EXCLUSION BEING PROFIT LEVEL INDICATOR (PLI) BEING EXTREME PROFIT. SIMILARLY IN ORDER TO EQUALIZE THE COMPARABLE THE TRIBUNAL ON FACTS CONCLUDED THAT COMPANIES HAVI NG MARGIN LESS THAN 6% IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. TH E TRIBUNAL HAS TAKEN A CONSCIOUS DECISION AND ARRIVED AT A CONCLUSION THAT THE COMPANIES HAVING MARGIN LESS THAN 6% IS TO BE EXCLUDED FROM THE COMP ARABLES ON FACTS AND CIRCUMSTANCES OF THE CASE. WHEN THE TRIBUNAL HAS ELABORATELY CONSIDERED AND TAKEN CONSCIOUS DECISION WE ARE OF THE VIEW TH AT THIS ISSUE CANNOT BE REVISITED BY US IN A MISCELLANEOUS APPLICATION. HE NCE THIS PLEA OF THE ASSESSEE IS REJECTED. IT IS ORDERED ACCORDINGLY. 9. REQUEST FOR RISK ADJUSTMENT IT WAS SUBMITTED THAT WHILE ARRIVING AT THE ALP/A RITHMETICAL MEAN OF PRICES THE TRIBUNAL HAS NOT CONSIDERED THE ASSESSEES PLEA THAT THE LOWER AUTHORITIES HAVE ALSO ERRED IN LAW AND FACTS BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR THE DIFFERENCES IN THE R ISK PROFILE OF THE COMPARABLE COMPANIES AND THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT IN VIEW OF THE LIMITED FUNCTIONS PERFORMED AND LIMITED RISK BORNE BY THE ASSESSEE IN RESPECT OF THE PROVISION OF SOFTWARE SE RVICES THE ASSESSEE CAN BE CHARACTERIZED AS A CONTRACT SERVICE PROVIDER OPE RATING IN A RISK MITIGATED ENVIRONMENT WHEREAS THE COMPARABLE COMPANIES WAS F UNCTIONING PAGE 10 OF 15 M.P. NO.102/BANG/2 010 10 ENTREPRENEURIAL RISK TAKING FUNCTIONS. IT WAS S UBMITTED THAT THE TP REGULATIONS IN INDIA RECOGNIZE THAT ADJUSTMENTS SHO ULD BE MADE FOR THE DIFFERENTIAL RISKS; HOWEVER THEY DID NOT PROVIDE AN Y SPECIFIC METHODOLOGY FOR MAKING SUCH ADJUSTMENTS. THE ASSESSEE RELIED O N THE DECISION IN THE CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LTD. V SCIT (ITA NO.218/BANG/08) AND SUBMITTED THAT THE TRIBUNAL OUGHT TO HAVE BEEN PROVIDED RISK ADJUSTMENT RELIEF WHILE COMPUTING THE MARGINS OF CO MPARABLE COMPANIES. ACCORDINGLY IT WAS PLEADED THAT THE ALP SHOULD BE RE DUCED AFTER NEGATING THE RISK DIFFERENTIAL. IT WAS PRAYED THAT A RISK AD JUSTMENT RELIEF OF 5.2% BE PROVIDED WHILE COMPUTING THE MARGINS OF COMPARABLE COMPANIES. 9.1 THE LEARNED DR SUBMITTED THAT THE ISSUE NOW RA ISED BY THE ASSESSEE HAS NOT BEEN RAISED BEFORE THE AUTHORITIES BELOW. IT WAS SUBMITTED THAT FUNCTIONS DISCHARGED ASSET DEPLOYED AND RISK UNDERTAKEN BY THE ENTERPRISES VARY FROM CASE TO CASE THEREFORE RISK ADJUSTMENT AS A STATIC FACTOR CANNOT BE APPLIED IN ALL THE CASES UN IFORMLY. 9.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. IN THIS CASE THE ASSESSEE IN ITS TRAN SFER PRICING STUDY HAS NOT MADE ANY WORKING RISK ADJUSTMENT. THE AO/TPO HAS NO T GRANTED ANY RISK ADJUSTMENT. THIS CLAIM OF RISK ADJUSTMENT WAS MADE BY THE ASSESSEE BEFORE THE TRIBUNAL FOR THE FIRST TIME. IT IS NOT CLEAR A S TO HOW THE ASSESSEE HAD ARRIVED AT THE RISK ADJUSTMENT RELIEF AT 5.25%. PAGE 11 OF 15 M.P. NO.102/BANG/2 010 11 9.3 THE ITAT MUMBAI E BENCH IN THE CASE OF M/S SYMANTEC SOFTWARE SOLUTIONS PVT. LTD. V ACIT IN ITA NO.7894/ MUM/2010 DATED 31.5.2011 FOR AY 2006-07 WHEREIN IT WAS HELD THAT ( PARA 16) - AS REGARDS THE DIFFERENCE IN FUNCTION AND RISK LEV EL ADJUSTMENT; THE ASSESSEE HAS RAISED THIS ISSUE WITH OUT QUANTIFICATION OF SUCH ADJUSTMENT ON THIS ACCOUNT. EVEN OTHERWISE UNTIL AND UNLESS SUCH DIFFERENCE RESULTS IN DEFLATION OR INFLATION OF FINANCIAL RESULT OF THE COMPARABLES IT IS NOT GENERAL RULE OF STANDARD ADJUSTMENT. THE ASSESSEE HAS NOT BROUGHT ON RECORD HOW SUCH FUNCTIONAL DIFFERENCE AND RISK HAS INFLUENCED THE RESULT OF THE COMPARABLES WITH QUANTIFIED DATA TO T HE SATISFACTION OF THE AUTHORITIES. THE ASSESSEE DID NOT QUANTIFY THE ALLEGED ADJUSTMENTS ON ACCOUNT OF DIFFERENCE IN RISK. HOWEVER THE ASSESSEE FIRST T IME FILED CERTAIN CALCULATION BEFORE THE DRP IN SUPPORT OF ITS CLAIM. THE SAID CALCULATION IS ALSO NOT ON THE BAS IS OF ANY FORMULA OR PRINCIPLE RATHER IT IS GENERAL IN NATURE . IN OUR OPINION SECOND PROVISO TO SUB.SEC.2 OF SEC.92C COV ER AND TAKE CARE OF THESE ASPECTS. SINCE IT IS IMPOSSIBLE TO HAVE A PERFECT COMPARABLE WITHOUT ANY DIFFERENCE OR VARIA TION REGARDING TURNOVER RISK PROFILE AND FUNCTIONAL DIFFERENCES; THEREFORE THE LEGISLATURE HAS PROVIDE D A MARGIN OF + 5% WHILE DETERMINING THE ALP. THEREFORE WHEN THE ASSESSEE IS HAVING BENEFIT OF CHOICE/OPTIO N AS PER THE SAID PROVISION AS EXISTED AT THE RELEVANT P OINT OF TIME NO SEPARATE ADJUSTMENT IS REQUIRED ON ACCOUNT OF RISK AND FUNCTIONAL DIFFERENCES. THEREFORE WE DO NOT FIND ANY MERIT AND SUBSTANCE IN THE CLAIM OF THE ASS ESSEE FOR ADJUSTMENT IN RESPECT OF RISK AND FUNCTIONAL DIFFERENCES. IN THE INSTANT CASE THE ITAT HAS ALLOWED BENEFIT O F DEDUCTION OF 5% (PARA 64) UNDER PROVISO TO SECTION 92C(2) AND IN VIEW OF THE DECISION OF ITAT PAGE 12 OF 15 M.P. NO.102/BANG/2 010 12 MUMBAI (SUPRA) NO SEPARATE ADJUSTMENT IS REQUIRED ON ACCOUNT OF RISK FUNCTIONAL DIFFERENCE. THEREFORE THIS PLEA OF THE ASSESSEE IS DISMISSED. 10. COMPUTATION OF THE ARMS LENGTH RANGE (PAGE NO.44-45 PARA NO.63) WHILE INTERPRETING PROVISO TO SECTION 92C(2) OF T HE ACT THE TRIBUNAL HAS MADE THE FOLLOWING OBSERVATIONS IN THE ORDER:- ..AT THE OPTION OF THE ASSESSEE THE ASSESSEE MA Y ADOPT A PRICE DIFFERENT FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN I .E THE ASSESSEE HAS AN OPTION TO CLAIM THE TAX PAYERS MARGINAL RELIEF AT 5% WITH REFERENCE TO THE ARITHME TICAL MEAN IRRESPECTIVE OF THE RANGE OF ACTUAL DEVIATION BETWEEN THE MARGIN DISCLOSED BY THE ASSESSEE AND TH E AVERAGE MEAN MARGIN. THEREFORE IN EFFECT THIS MARGINAL RELIEF TAKES THE CHARACTER OF A STANDARD DEDUCTION OF 5%. FOR EG. IN A CASE AVERAGE MEAN O F THE ALP DETERMINED BY TPO/AO IS 20% AND THAT ONE DISCLOSED BY THE ASSESSEE IS 10%. THE ASSESSEE WILL GET A STANDARD DEDUCTION OF 5% AND THE ASSESSEES ALP WIL L BE INCREASED TO 15% AND THEREAFTER THE DIFFERENCE OF 5 % BETWEEN 20% AND 15% ALONE SHALL BE ADDED AS ALP ADJUSTMENT. (PAGE NOS.44-45 PARA NO.63) WE HAVE DETERMINED THE OPERATING MARGIN OF THE ASSESSEE COMPANY AT 8.80%. WE HAVE ALSO ACCEPTED TH E CONTENTION OF THE ASSESSEE THAT IT IS ENTITLED FOR 5% STANDARD DEDUCTION IN VIEW OF THE PROVISO TO SEC. 9 2C(2) AS IT IS STOOD FOR THE ASSESSMENT YEAR 2003-04. WHE N THAT BENEFIT OF 5% IS GIVEN TO THE ASSESSEE ITS OP ERATING MARGIN FOR THE PURPOSE OF DETERMINING THE ALP WILL BE BLOATED TO 13.80%. PAGE 13 OF 15 M.P. NO.102/BANG/2 010 13 10.1 IN THE COURSE OF HEARING OF THE MISCELLANEOUS APPLICATION IT WAS SUBMITTED THAT THE PROVISO TO SECTION 92C(2) OF THE ACT PROVIDES THAT THE ARMS LENGTH RANGE OF +/- 5% SHOULD BE COMPUTED FROM THE ARITHMETICAL MEAN OF THE PRICE OF THE COMPARABLE COMPANIES (AND NOT THE ASSESSEES TRANSFER PRICE). THE ASSESSEES COMPUTATION FOR D ETERMINING ARMS LENGTH RANGE OF +/- 5% RELIEF IS AS FOLLOWS:- PARTICULARS AMOUNT (IN %) A TRANSFER PRICE DETERMINED BY THE APPELLANT 1 08.80 B ARITHMETICAL MEAN OF THE PRICES OF COMPARABLE COMPANIES AS PER ITAT ORDER DATED AUGUST 30 2010 120.57 C LOWER OF THE ARMS LENGTH RANGE (B*95%) 114. 54 D HIGHER OF THE ARMS LENGTH RANGE (B*105%) 12 6.60 E ADJUSTMENT TO BE MADE TRANSFER PRICE (C-A) 5.74 10.2 PURSUANT TO THE IMPUGNED ORDER OF TRIBUNAL T HE TPO HAS COMPUTED THE OPERATING REVENUE OPERATING COST AND OPERATING PROFIT AS UNDER:- OPERATING REVENUE AS PER BOOK RS.71 69 87 294 ADD-FOREIGN EXCHANGE FLUCTUATION GAIN RS.100 48 326 OTHER INCOME RS.2 12 081 A ADJUSTED OPERATING REVENUE RS.72 72 47 701 TOTAL EXPENSES AS PER BOOK RS.68 00 34 163 LESS : TERMINATION CHARGES RS.1 05 00 000 B ADJUSTED OPERATING COST RS.66 95 34 163 C OPERATING PROFIT (A-B) RS.5 77 13 538 OPERATING PROFIT/COST 8.62% BASED ON THE WORKING GIVEN ABOVE ADJUSTMENT TO BE MADE FOR ARRIVING AT TRANSFER PRICE ACCORDING TO THE REVENUE IS AS FOL LOWS:- TRANSFER PRICE AS PER GIVEN ABOVE 108.62 ARITHMETICAL MEAN OF THE PRICE AFTER ALLOWING ARMS LENGTH RANGE OF +/-5% RELIEF 114.52 ADJUSTMENT TO TRANSFER PRICE (114.52-18.62) 5.90 PAGE 14 OF 15 M.P. NO.102/BANG/2 010 14 THUS ACCORDING TO THE REVENUE ADJUSTMENT OF TRANS FER PRICING WOULD BE 5.90% INSTEAD OF 5.74 AS CLAIMED BY THE ASSESSEE. 10.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. WHEN THERE ARE TWO PRICES DETERMINED BY THE MOST APPROPRIATE METHOD THE FIRST STEP IS TO TAKE THE ARITHMETICAL MEAN OF SUCH PRICES AS ALM. HOWEVER THE ASSESSEE HAS THE OPTION TO ADJUS T THE ABOVE ALM BY + 5%. HERE THE TWO DIFFERENT PRICES ARE - BY THE A.O. - 20.57 BY THE ASSESSEE - 8.80 THE ADJUSTMENT OF 5% IS DONE ON ASSESSEES COMPUTAT ION TO ARRIVE AT 13.80%. THE RELEVANT FINDING OF THE TRIBUNAL AT PARA 98 OF THE IMPUGNED ORDER READS AS FOLLOWS:- THE ASSESSING AUTHORITY WILL FURTHER FIND OUT THE OPERATING PROFITS AT ASSESSEES RATE OF 13.80% AND THE OPERATING PROFITS AT THE ARITHMETIC MEAN RATE OF 20 .57% ON THE BASIS OF THE REVISED REVENUE AND COST COMPUT ED IN PARAGRAPH ABOVE. THE DIFFERENTIAL AMOUNT SHALL BE THE ADDITION TO BE MADE IN TERM OF THE ALP ADJUSTMENT. THIS AMOUNT WILL BE CORRESPONDING TO THE DIFFERENTIAL OPERATING MARGIN OF 6.77%. HOWEVER THE ARITHMETICAL MEAN OF TWO PRICES HAS NO T BEEN DONE. ONLY AFTER ARRIVING AT THE ARITHMETICAL MEAN OF TWO PRICES TH E ADJUSTMENT OF 5% CAN BE DONE. FOR THIS PURPOSE THIS ISSUE IS RESTORED TO THE FILE OF THE AO WHO SHALL IN TURN MAY REFER THE MATTER TO THE TPO. PAGE 15 OF 15 M.P. NO.102/BANG/2 010 15 11. IN THE RESULT THE MISCELLANEOUS PETITION IS P ARTLY ALLOWED AS INDICATED ABOVE. SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED : 09/11/2011 COPY TO:- 1.THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCE RNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR ITAT BANGALORE.