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TMI Blog2012 (10) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... US. 6(b) The ld. CIT (A) erred in overlooking the basic facts that the appellant was obliged to take 25 persons on a monthly basis as per the contract between the appellant and its AE and due to 9/11 incident, there were personnel "sitting on the bench", who could not be deputed to any client/customer of the appellant. Consequently, the ld. CIT (A) failed to appreciate the loss incurred, and erred in attributing such business loss as unbilled hours of the AE" 3. Brief facts of the issue are, the assessee is in the business of software development by resourcing qualified personnel for the purpose. The assessee during the relevant financial year had international transactions with its Associated Enterprise (AE) M/s Cypress Associates Inc. Of USA which is its 100% subsidiary. On a reference made by the AO u/s 92CA(1) of the Act the TPO issued notice u/s 92CA(2) to the assessee for fixation of Arm's length Price (ALP) in respect of the international transaction entered into by the assessee with its AE in USA. In course of the proceeding the TPO found that the assessee had paid an amount of Rs.13,39,79,178 to its AE M/s Cypress Associates Inc. USA @ Rs.61.39 USD for a total of 45,662 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess. He accordingly calculated the ALP. The payment made to the AE by the assessee was found to be not within the +/- 5% range and therefore was not accepted. The calculation of ALP by the TPO is reproduced below for the sake of convenience. Man hours paid to A.E : 45,662 Man hours charged from clients 41,921 Difference 3,741 Less: Unbilled for demo purpose etc. 241 Balance 3,500 Payments by the assessee to AE Rs.13,39,79,178 Less: 3500 man ours @ 61.39$ x 48 Being excess paid to AE when compared to Actual services rendered Rs. 1,03,13,520 Arm's Length Price Rs.12,36,65,658 ALP Range + 5% : 14,06,78,136 - 5% : 12,72,80,219 4. The AO completed he assessment by adopting the ALP determined by the TPO and made an addition of Rs. 1,03,13,520/-. The assessee challenged the determination of ALP and addition made as a result of such determination by filing an appeal before the CIT (A). In course of hearing of appeal before the CIT (A), the assessee submitted that excluding Ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry to the accepted contractual norms involving transaction between unrelated parties. The CIT (A) came to a conclusion that sharing of loss/expenditure arising out of unforeseen situations should be in the ratios of comparative situations and risks of the parties involved in the transactions which were not found to be the case in the agreement between assessee with its AE. As has been observed by the CIT (A) in his order after analysing the Transfer Pricing Study Report filed by the assessee the CIT (A) found that in the transactions between the assessee and its AE, most of the risk factors were associated with the AE. However the agreement with AE regarding payment for minimum 25 Nos. Of personnel put the assessee at a disadvantageous position contrary to the findings in the Transfer Pricing Study Report. The CIT (A) ultimately came to a conclusion that the agreement with AE was deliberately constructed in a manner so as to put all possible losses arising on account of unutilised manpower on the assessee. On the aforesaid conclusion the CIT (A) held that the agreement between the assessee and its AE was not at arm's length and the payment made by the assessee to its AE for unavail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only which was also explained by the ld. AR to be due to personnel deployed for demo purpose., sick leave, privilege leave etc. The ld. AR further submitted even assuming there is excess payment for 1370 man hours the payment made by the assessee to its AE will be within +/- 5% range of ALP. The ld. AE demonstrated it with the following calculation. "Number of hours paid for to M/s Cypress Associates Inc. Rs.45,662 Less: Number of hours billed to clients Rs.41,922 Balance 3740 Less: No. Of unbilled hours lost in November, 2001 2370 Balance 1370 Payments by the assessee to AE Rs.13,39,79,178 Less: 1370 man hours @ 61.39$ x 48 Being excess paid to AE when Compared to actual services Rendered Rs. 40,37,006 Arm's length Price Rs.12,99,42,172 ALP Range + 5% : 14,06,78,136 -5% : 12,72,80,219 The learned AR further submitted that when the assessee's income is exempt and the AE's profits are taxable there was no reason on the part of the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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