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TMI Blog2011 (2) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of 5% is not applicable if a single price is determined by the assessee. Even the Circular No.12 dated 23-08.2001 issued by the CBDT does not apply to the case under consideration as the price variation is more than 5% and said circular is applicable only if the variation in price with the associated enterprise, vis-a-vis the unrelated party is within the limit of [+] or [-] 5%. In view of the above CIT(A) is not justified in allowing 5% adjustment in terms of section 92C (1) of the Act - IT APPEAL NOS. 106 & 155 (HYD.) OF 2009 - - - Dated:- 25-2-2011 - SHRI G.C.GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER Assessee by : Shri Rajan Vora Department by : Smt. Vasundhara Sinha ORDER 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 CIT(A) III, Hyderabad dated 18.11.2008 for the assessment year 2004-05. 2. The main issue arising for consideration in these cross appeals is against the adjustments made under S.92CA of the Act. 3. Facts of the case in brief are that the assessee company is engaged in rendering software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the restriction of differential adjustment only to Rs. 42,82,338. The CIT(A) thus, partly allowed 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 the CIT(A) was not justified in confirming the application of the Transactional Net Margin Method without making appropriate adjustments for difference in accounting policies and risks between the controlled transactions and comparable uncontrolled transactions in accordance with provisions of Rule 10B(1)(e). He further submitted that the lower authorities were not justified in rejecting of contemporaneous data, i.e. data existing by the due date of filing of return of income and multiple year data of comparable companies in determination of Arm's Length Price. He also submitted that the Assessing Officer was not justified in using the financial information of the comparable companies pertaining to the financial year 2003-04 only, as the same was not available at the time of preparing the documentation. He also que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are borne by the comparable companies vis-a-vis the assessee who is insulated from those risks, is furnished. Further, it is submitted that the assessee company bears lesser business risk than independent comparable companies due to the nature of its revenue model. It is guaranteed of profits by way of a mark-up-on costs incurred, regardless of its success or failure. The assessee has been providing services 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 insufficient 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 the working capital adjustments, further submitted that there exist differences in the accounts receivable and accounts payables of comparable companies vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and as a consequence, the margins earned by the assessee would be comparatively lower to reflect the lower level of functions and risks. Inviting our specific attention to pages 323 to 325 of the paper-book, he submitted that on this basis, 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. ITO (118 ITD 243)-Pune. (b) Mentor Graphics (P.) Ltd. v. DCIT (2007(109 ITD 101). (c) Sony India Pvt. Ltd. v. DCIT and vice versa (114 ITD 448)-Pune. (d) Philips Software Centre (P.) Ltd. v. ACIT (26 SOT 226). (e) Diamond Dye Chem Ltd. v. DCIT (2010 TII 20 ITAT Mum-TP). (f) Quark Systems Pvt. Ltd. v. DCIT (2010 TII 31 ITAT Mum-TP). (g) ACIT v. Fiat India Pvt. Ltd. (2010 TII 30 ITAT Mum-TP). (h) Schefenacker Motherson Ltd. v. ITO (ITA No.4459/DEL/07 ITA No.4460/Del/07). (i) Skoda Auto India Pvt. Ltd. v. CIT (30 SOT 319)-Pune. 10. He also questioned the action of the Revenue authorities in rejecting the comparable cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even with regard to Quintegra Solutions Ltd., she submitted that the financial results of this company are for the year ending September, 2004 and not March, 2004 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 being compared. She further submitted that since the assessee itself has not provided for any adjustment on account of working capital risk in the Transfer Pricing Document, there is no justification for allowing the same at the assessment or appellate stages. She submitted that there is no thumb rule to provide for such adjustments, and such allowance of working capital risks would depend on the facts and circumstances of each case. Since the assessee has not been able to make out any case for suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake 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 accordance with Rule 10B(1)(e), while arriving at the ALP. We find that as per the report of the TPO at page No.19 of his order that the comparables were selected by the assessee after undertaking FAR analysis of the controlled and uncontrolled parties and the transactions are in terms of similarities. The assessee has not quantified or identified any differences, while undertaking the FAR analysis in the transfer price documentation and no adjustment was made on that count. Hence, at this stage, the assessee cannot take any plea in that regard. Since the assessee itself has not made any such adjustment, the case-law relied upon by the assessee in this behalf, is not applicable to the facts of the present case. Risk adjustments can be given only on company to company basis, considering the peculiar facts and circumstances of the case. In the circumstances, we 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 the rejection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The Learned Departmental Representative strongly relying on the order of the Assessing Officer submitted that the CIT(A) was not correct in directing the Assessing Officer to exclude the expenses under communication charges from the total turnover. 17. The learned counsel for the assessee, besides opposing the above contentions of the Learned Departmental Representative submitted that the assessee develops computer software in synchronization with other development teams across the globe and requires to be networked with the other teams on a continuous basis. In this process, the assessee has obtained data links service from service providers. Though the software developed by the assessee is delivered through the data links in India, the assessee has neither incurred any expenses specifically for data link charges towards the delivery of the computer software outside India 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 is such that it requires substantial interaction between the personnel of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue, in Revenue's appeal, whether the assessee company is entitled to the adjustment of 5% as stipulated under section 92C(1) of the Act. The undisputed fact in the case under consideration is that only one method called TNMM was applied to find out the ALP price. In our considered opinion, where the ALP has been determined by applying only one out of the several methods 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 Tribunal 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 Sony (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 apply to the case under consideration as the price variation is more than 5% and said circular is applicable only if the variation in price with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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