9911796707
TMI Blog2011 (11) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the Arm's Length Price ("ALP"). 2.1 The AO passed an assessment order u/s 143(3) of 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 the TPO) in his order dated March 15, 2006, pursuant to a reference of the assessee's case by the AO] 3. On appeal, the adjustment to the ALP made by the AO u/s 92CA was confirmed by the CIT(A) vide order dated January 28, 2008. 4. Being aggrieved by the order of the CIT(A), assessee preferred an appeal before the Tribunal. The Tribunal 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 regarding the determination of ALP in respect of transactions entered into by the assessee with its Associated Enterprises (AE). The Tribunal, based on a detailed analysis of the assessee's and the TPO's approach to selection of comparable data, determined the ALP margin for the transaction at 20.57% and re-worked the assessee's margin at 8.80%. Further, a standard deduction of 5% on the assessee's margin ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unreliability of the accounts has also been admitted by the Managing Director of Satyam in his communication to the Securities and Exchange Board of India (SEBI), the authority for regulating the capital markets in respect of listed companies in India. Therefore, it was submitted that having known the true state of affairs of Satyam as on the date of pronouncement of the order of the Tribunal i.e. 30th August, 2010, the assessee pleads that Satyam should not be included in the comparables set for determining the ALP of the international transactions undertaken by the assessee during the financial year 2002-03. 7.2 We have heard the rival submissions and perused the material on record. We noticed that the assessee company selected 22 comparables in the transfer pricing document and M/s Satyam Computers 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 selected 8 comparables and excluded Satyam Computers Services Ltd. selected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious Tribunals have taken note of the fact that Satyam cannot be accepted as a comparable. For instance, in the case of Agnity India Technologies (P.) Ltd. (IT Appeal No.3856/Delhi/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 statements were not reliable. For the above said reasons, we direct that Satyam Computers Services Ltd. should not be taken as a comparable company to arrive at the ALP. Hence, this plea of the assessee is allowed. Rejection of comparable companies with margins less than 6% (Including comparable companies with negative margins) 8. In arriving at the set of comparable companies, the 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 extreme 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 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now raised by the learned counsel for the assessee has been elaborately dealt with by the Tribunal from pages 55 to 57 of the impugned order. The Tribunal was of view that extreme cases should not be included as comparables. Extreme comparables of positive higher and also lower side should be excluded. From the same, it can be seen that the comparables selected by the TPO/AO, the profit margins 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 having margin less than 6% is to be excluded from the list of comparables. The 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 comparables on facts and circumstances of the case. When the Tribunal has elaborately considered and taken conscious decision, we are of the view that this issue cannot be revisited by us in a Miscellaneous Application. Hence, this plea of the assessee is rejected. It is ordered accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has raised this issue without 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 the satisfaction of the authorities. The assessee did not quantify the alleged adjustments on account of difference in risk. However, the assessee, first time filed certain calculation before the DRP in support of its claim. The said calculation is also not on the basis of any formula or principle rather it is general in nature. In our opinion, second proviso to sub-sec. (2) of sec.92C cover and take care of these aspects. Since it is impossible to have a perfect comparable without any difference or variation regarding turnover risk profile and functional differences; therefore, the legislature has provided a margin of +/-5% while determining the ALP. Therefore, when the assessee is having benefit of choice/option as per the said provision as existed at the relevant point of time, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice determined by the appellant 108.80 B Arithmetical mean of the prices of comparable companies, as per ITAT order dated August 30, 2010 120.57 C Lower of the arm's length range (B*95%) 114.54 D Higher of the arm's length range (B*105%) 126.60 E Adjustment to be made transfer price (C-A) 5.74 10.2 Pursuant to the impugned order of tribunal, the 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 follows:- Transfer price as per given above 108.62 Arithmetical mean of the price after allowing arm's length range of +/-5% relief 114.52 Adjustment to transfer price (114.52-18.62) 5.90 Thus, according to the revenue, adjustm ..... 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