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2010 (3) TMI 898 - AT - Income TaxTransfer pricing - ALP Comparable - assessee supplied software to Vedaris, UK, which was an international transaction - documents were not maintained to justify the ALP on cost plus method, the matter was discussed further with the assessee and finally the Transactional Net Margin Method ( TNMM for short) was adopted for determining the ALP - CIT(A) was of the view that there were five valid comparables Held that - Four comparables were involved in different lines of business and, therefore, did not meet requirements of rule 10C, which was a major factor in judging comparability of a case on facts, ALP was to be determined only on basis of remaining one comparable - proviso as it existed for the relevant assessment year states that where more than one price is determined by the most appropriate method, ALP shall be taken to be arithmetical mean of such price, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean - provision is applicable where more than one price is determined by the appropriate method - there is only one comparable case of Soffia Software Ltd. Since more than one price has not been determined, the proviso is not applicable on the facts and in the circumstances of this case - appeal of the revenue dismissed
Issues Involved:
1. Validity of the orders passed by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)]. 2. Determination of the arithmetical mean of comparables and the resulting transfer pricing adjustment. 3. Granting suitable adjustments to the net profit margins, particularly working capital and risk adjustments. 4. Consideration of judicial precedents in similar cases. 5. Granting the benefit of +/-5% variance as per proviso to section 92C(2). 6. Acceptance of the results shown by the appellant. 7. Deletion of the transfer pricing adjustment confirmed by CIT(A). Detailed Analysis: 1. Validity of Orders Passed by AO and CIT(A): The assessee contended that the orders passed by the AO under section 143(3) and CIT(A) under section 250 were bad in law and on facts. The Tribunal examined the procedural and factual correctness of these orders and found them to be in accordance with the law, thereby rejecting the assessee's contention. 2. Determination of Arithmetical Mean and Transfer Pricing Adjustment: The CIT(A) upheld the AO's adjustment of Rs. 1,06,38,003 by taking the net profit margin at 16.584% against the margin of 7.82% declared by the assessee. The AO had referred the matter to the Transfer Pricing Officer (TPO), who initially identified 118 comparable cases and shortlisted 20 companies. The TPO applied the Transactional Net Margin Method (TNMM) and determined the average profit margin of 16.585%. The CIT(A) further refined this list by excluding companies with significant related-party transactions, very high or low turnover, and different functionality, finally considering five valid comparables. 3. Granting Suitable Adjustments: The assessee argued for adjustments in net profit margins for working capital and risk adjustments as per rule 10B(1)(e)(iii). The CIT(A) acknowledged the provision for such adjustments but denied them due to the lack of reasonably accurate data. The Tribunal agreed with the CIT(A) but restored the matter to the AO to consider the working furnished by the assessee and decide on the adjustment based on the accounts of Soffia Software Ltd. 4. Consideration of Judicial Precedents: The assessee cited various judicial precedents, including decisions from the Pune and Mumbai Benches of the Tribunal, to support its case. The Tribunal considered these precedents but focused on the specific facts and comparables of the current case to arrive at its decision. 5. Benefit of +/-5% Variance: The assessee requested the benefit of +/-5% variance as per the proviso to section 92C(2). The Tribunal found that this provision applies only when more than one price is determined by the most appropriate method. Since only one comparable (Soffia Software Ltd.) was finally considered, the proviso was deemed inapplicable. 6. Acceptance of Results Shown by the Appellant: The assessee argued that the results shown in its books were fair and reasonable. However, the Tribunal, after considering the comparables and adjustments, determined that the results needed adjustment and thus did not accept the results as shown by the appellant. 7. Deletion of Transfer Pricing Adjustment: The assessee requested the deletion of the transfer pricing adjustment of Rs. 1,06,38,003 confirmed by the CIT(A). The Tribunal, after detailed analysis and adjustments, partly allowed the assessee's appeal, thereby modifying the adjustment amount. Conclusion: (i) The stay application was dismissed. (ii) The appeal of the assessee was partly allowed. (iii) The appeal of the revenue was dismissed subject to remarks made in the body of the order.
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