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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 ..... 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 reason that the assessee used two years data, viz. financial years 2002-03 and 2003-04. Out of the fourteen comparable cases selected by the assessee, ten comparable cases were not accepted by the Transfer Pricing Officer on the ground that they had substantially related party transactions or the companies were functionally different. The Transfer Pricing Officer accepted the remaining four comparable cases and computed the arithmetic 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. 41,54,91,785 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 section 143(3) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of independent comparable companies to take into account the differences in functions an risks. International commentaries on Transfer Pricing also recognize that adjustments must be made to account for differences between controlled and uncontrolled situations that would significantly effect the price charged or return required by independent Enterprises and as such in no event can unadjusted industry's average returns themselves establish arm's length conditions. He submitted that one of the principal elements for transfer pricing purposes is the analysis of risks assured by the respective parties in the open market in theory and the assumption of increased risk is normally compensated by an increase in the expected return. Accordingly, he submitted that controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed is made. It is further submitted that as mentioned in the transfer pricing report, the assessee functions under a limited risk environment with most of the risk being assumed by the Associated Enterprises, which is an undisputed fact. The comparable selected for the analysis inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working capital adjustment is the most common adjustment applies worldwide by taxpayers and by several business commentators. Asset intensity or balance sheet adjustments are intended to account for the fact that the 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 counsel for the assessee submitted that adjustments to reflect the differing levels of accounts receivable and account payable, viz. working capital adjustments, between the taxpayer 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 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above comparables is selected then the assessee's margin falls within the arm's length price, even without considering the adjustment on account of risk or working capital adjustment and consequently, the entire adjustment made by the Transfer Pricing Officer and partially upheld by the CIT(A), shall be deleted. 11. With regard to use of multiple year data, learned counsel for the assessee, placing reliance on Rule 10D(4) submitted that transfer pricing documentation should, as far as possible be contemporaneous 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 companies do not publish the financial year results by the due date, it is submitted 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 contemporaneous data available by the prescribed date should be allowed. He filed detailed written submission reiterating and elaborating the above submissions. 12. Learned Departmental Representative on the other hand, opposed the above submissions of the assessee, and on the above aspects arising out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable and the decisions relied on by the learned CIT(A) are distinguishable and in any event, they are not 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, strongly supported the order of the CIT (A) insofar as allowance of 5% margin is concerned. 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 Enterprises, which may vary from the Arm's Length Price by plus or minus 5%. According 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-sections (1) and (2) of section 92C and therefore, it should be appreciated that the Assessing Officer/Transfer Pricing Officer is mandatorily required to calculate the Arm's Length Price in accordance with section 92C(1) and 92C(2) of the Act. In support of these contentions, reliance is also placed on the Explanatory Memorandum to Finance Bill, 2001 and the clarifications contained in Notes on Clauses- Income-tax (Finance Bill, 2002). Learned counsel for the assessee, justified +/- 5% adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the TPO. The assessee agreed with the TPO for rejection of eight companies, and the other companies available were only two companies. That is one Aztec Software and the other one is Quintegra Solutions Ltd. These companies were rejected by the TPO for the reason that it had substantial related party transactions, which work out to more than 25% of the total sales. Hence, the findings given by the CIT(A) in rejecting these two companies as not comparable, in our considered opinion, are in order. One other contention of the assessee relates to use of multiple year and contemporaneous data available by the prescribed data. As per Rule 10B(4), 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. In view of the above, the CIT(A) is right in holding that the data of the subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Sak Soft Ltd. (30 SOT 55) and the 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 reduced 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 issue. 18. We have considered the rival submissions and perused the orders of the lower authorities. At the outset, we may reject the ground of the assessee on this issue, since as noted above, it is contended by the learned counsel for the assessee that though the view taken by the CIT(A) that entire data link charges are attributable to delivery of computer software outside India is not acceptable, he is not pressing this ground since it is does not have ultimately any revenue impact and as such it is only of academic interest. As for the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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