9911796707
TMI Blog2013 (11) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... on specific industries along with the information in relation to potential targets located in various jurisdictions. For this purpose, GASC LLC has entered into exclusive service agreements with its wholly owned subsidiary companies based in different countries including the assessee-company which is based in India. As per the service agreement, the assessee-company collects necessary information to be provided to GASC LLC in relation to the following matters; (i) the economic and political conditions of India, (ii) the information technology sectors of the economy of India (iii) particular information technology enterprises in India (iv) possible investment opportunities involving information technology enterprises in India. During the year under consideration, the assessee-company received a total amount of Rs. 26,31,02,420/- on account of the services rendered to its holding company GASC LLC as per the service agreement and keeping in view these international transactions of the assessee-company with its Associate Enterprise (AE), a reference was made by the A.O. to the TPO u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own by the assessee. Accordingly, the difference of Rs. 13,10,03,941/- was determined by him as a transfer pricing adjustment required to be made to the total income of the assessee in the order dtd. 26-10-2010 passed u/s 92CA (3) of the Act. 4. As per the order passed by the TPO u/s 92CA(3) of the Act addition of Rs. 13,10,03,941/- was proposed by the A.O. on account of T.P. adjustment in the draft assessment order and the same was forwarded by him to the assessee. The assessee raised various objections against the said draft assessment order suggesting the variation in its income with regard to the Transfer Pricing adjustment. Elaborate submissions were made before the DRP on behalf of the assessee in support of its stand on this issue which, as summarized by the DRP, were as under:- "(i) The taxpayer submitted that the TPO did not understand the correct business profile of the taxpayer. (ii) The taxpayer, GAPL, is a company registered in the India and belongs to the GA group of companies. (iii) The taxpayer is a captive service provider for GASC LLC providing investment, management and consultancy ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; - TPO erred In failing to inform GAPL as to how the documentation maintained and the data used in computation of arm's length price is not reliable or correct. Use of contemporaneous data: - TPO erred in law by considering data which was not available at the time when GAPL had undertaken the transfer pricing study. - TPO erred by not allowing GAPL to use multiple year data for computing margin of the comparables. (xi) The AR contended before the DRP that the TPO relied on the comparables selected for AY 2006-07 without undertaking new search. This cherry picking "Was not acetated to the taxpayer. The comparables selected by the TPO should be treated as erroneous and not good and worthy comparables. (xii) The AR also questioned the action of the IPO in not making adjustment for market risk, for the comparables selected. He stated that GAPL, being the service provider, should be allowed this risk premium. (xiii) As an alternativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view the relevant regulations as summarized above and having regard to the facts of the case, the DRP held that the activities of the assessee were akin to merchant banking and investment banking and the eight comparables selected by the A.O./TPO were correct. The DRP also agreed with the TPO in the matter of risk adjustment sought by the assessee and upholding the decision of the TPO on this issue, it held that no interference with the same was called for. The DRP also agreed with the TPO that the assessee was not entitled for +/- 5% adjustment in terms of the proviso to section 92C(2) of the Act. Accordingly directions were given by the DRP to the A.O. u/s 144C(5) of the Act vide order dtd. 16-8-2011 and as per the said directions, final assessment was completed by the A.O. vide order dtd. 24-8-2011 making addition to the total income of the assessee on account of TP adjustment at Rs. 13,10,03,941/-. Aggrieved by the order of the A.O. passed u/s 143(3) r.w.s. 144C(13), the assessee has preferred this appeal before the Tribunal disputing the addition made therein on account of TP adjustment. 7. The counsel for the assessee, at the outset, submitted that a similar set of eight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in assessee's own case for A.Y. 2006-07. He contended that the proviso to section 92C(2) is very clear in this regard and this position has been accepted by the Tribunal in the case of Haworth (India) (P.) Ltd. v. DCIT (2011) 131 ITD 215. 9. As regards the claim of the assessee for risk adjustment, he invited our attention to the relevant portion of the TP study report furnished by the assessee at page 33 of the paper book to point out that IDC (India) Limited (supra) was identified by the assessee company itself as comparable and no risk adjustment was claimed in respect of the said comparable in the TP study report. He contended that although the said claim of risk adjustment was made by the assessee before the TPO for the first time, it could not be allowed when it was not claimed in the TP study report by the assessee-company. Reference was made by him to Rule 10B(3) of the Income Tax Rules to contend that the risk adjustment can be made only when there is material differences and adjustment can be accurately made to eliminate such difference. He submitted that there are different types of risks involved in the business and it is very difficult to identify the different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verage margin of three years was taken into consideration in the said TP study report to eliminate the risk and therefore adjustment for risk was not separately made. He submitted that the TPO, however, took only the relevant year data and keeping in view the same risk adjustment was claimed by the assessee. Refering to the relevant portion of the Tribunal's order for 2006-07, he submitted that a similar submission was made by the assessee before the Tribunal by submitting that multiyear data should be taken into consideration to eliminate the risk adjustment factor. He submitted that even before the DRP, specific objections were raised by the assessee on risk adjustment by making elaborate submission in the year under consideration, but the DRP has rejected the same in one line without giving any reason whatsoever. As regards the Tribunals' decision relied upon by the ld. D.R., he submitted that the claim of an assessee for risk adjustment therein was rejected for want of relevant information and data while assessee in the present case has furnished all such information and data even before the authorities below including the TPO while claiming the risk adjustment. 13. We have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in the case of Haworth (India) (P.) Ltd. (supra) was subsequently followed by the Mumbai Bench of ITAT in the case of IIML Asset Advisors Ltd. (supra) cited by the ld. D.R. wherein it was held that where only one comparable was finally selected by following the appropriate method which was acceptable to both parties and it was possible to compute the ALP on the basis of even one comparable, the assessee would not be entitled to the benefit of 5% range as per the proviso to section 92C(2) of the Act. 15. The contention raised by the ld. counsel for the assessee in this regard is that both the above decisions of Delhi & Mumbai Bench of ITAT were rendered prior to the amendment made in the proviso to section 92C(2) of the Act and therefore effect of the said amendment was not taken into consideration. It is, however, observed that while deciding a similar issue in assessee's own case for A.Y. 2006-07, the Tribunal has duly taken into consideration the proviso to section 92C(2) of the Act as substituted by the Finance (No. 2) Act, 2009 as well as Explanation inserted by the Finance Act 2012 with retrospective effect from 1-10-2009 and on such consideration, it was held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee in the case of Interra Information Technologies (India) (P.) Ltd. (supra) while claiming the risk adjustment on the ground that the assessee was a captive service provider. The Tribunal, however, rejected the said claim holding that being dependent on only one source for work is a risk factor to be considered. In the case of Marubeni India (P.) Ltd. (supra) cited by the ld. D.R., it was reiterated by the Tribunal that the risk adjustment could not be allowed when the assessee failed to bring any evidence on record to show the difference in the risk profile of the comparable companies vis-à-vis the assessee. Since the assessee in the said case had failed to file the details exhibiting the risk borne by the comparable, the Tribunal found it difficult to allow any risk adjustment. 18. The ld. counsel for the assessee has submitted before us that elaborate submissions were made on behalf of the assessee before the TPO as well as DRP, but the same have not been considered by them. A perusal of the order of the TPO, however, shows that the submissions of the assessee on this issue were duly considered and dealt with by the TPO which is evident from para 6.6 of his ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise on the basis of the stock prices, that the risk management is centered in the efficient use of capital alone and that the capital and risks are closely interrelated and an efficient management of one must entail an efficient management of the other. In fact this is myopic disposition of a business function. An enterprise however comprises of a collection of activities that entail risks. To conduct these activities and respond to their risks, the firm needs not just the capital alone, but it has to strategize in variety of ways to respond to the factors which influence its sustenance, growth and profitability, but it has no control over these factors. In other words, it may need capital primarily to fund its operations. to cushion it against adverse financial results, and to assure observers of its financial soundness; but this over emphasis of Capital and its availability is primarily from the investor's point of view which is more myopic than panoramic. The fact of the matter is - Not all types of risks faced by an entity can be captured purely through Stock Market performance .Thus, risk management may involve the efficient use of capital, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the investor has a choice of wide range of investment opportunities varying from zero risk Government securities to high risk investments such as stocks, mutual funds etc. So, this theory should be used only for investors who have a wide choice of portfolios to invest. However, in the case of taxpayer, the parent company's main aim is to reduce cost by outsourcing to India and it is not the case of the parent company that it has unlimited choice for starting various businesses of different risk. The parent company's aim is to outsource its services to India. Here, it does not have any choice but to invest in India in the form of a business concern. So, the CAPM may have limited applicability while taking decision by the parent company to do business in India through its subsidiary. The CAPM model mainly works on the return on capital employed in the form of equity or debt. It does not recognize the presence of intangibles including human capital. The above model may be a good tool in the industries in which human capital or any other intangible does not play a major role like manufacturing sector. One more problem with the above method is that it uses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge clients and high repeat business lead to predictable revenue growth and lower marketing costs. Therefore, to strike a balance, we have chosen to limit the revenue from any single client to a maximum of 10% of total revenue." Even in the stock market, shares of companies which are heavily dependent upon a very limited number of clients get lesser premium than the shares of the companies having multiple clients' base. Dependence upon a particular client or a particular geography alone is always considered a greater risk. Thus, doing business exclusively with a single client or a single group of clients carries different type of risk and therefore exclusivity clause in any contract is often accompanied by a balancing premium. The taxpayer should also be entitled to a premium on account of single customer risk on the same lines as an independent entrepreneur would claim premium for bearing market risk. There are factors at work that actually place a captive service provider in a much higher risk zone. For example, a captive service provider is completely dependent on its associated enterprise and any downswing impact in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. counsel for the assessee has invited our attention to the working of risk adjustment furnished by the assessee on page No. 213 of the assessee's paper book which is as under:- Particulars % Net cost plus margin of IDC (India) Ltd. % (A) 15.80% Risk Adjustment for AY 2007-08 Prime Lending rate for F.Y. 2006-07 10.25% Bank rate for F.Y. 2006-07 6% Risk adjustment (Prime Lending Rate less Bank Rate)(B) 4.25% Risk adjusted net cost plus margin of IDC (C=A-B) 11.55% Cost plus markup GAPL 12.60% Result Arm's length As is clearly evident from the above working, the difference between the prime lending rate and bank rate is sought to be adopted by the assessee as the rate to eliminate the risk difference. As already noted, the claim of risk adjustment of the assessee has been rejected by the Tribunal in A.Y. 2006-07 for want of quantification of such adjustment which, according to the Tribunal, could be possible only when some real and accurate facts of difference in the risk assumed by the assessee and by the comparable are brought on record. The details furnished by the assessee, in our opinion, are hardly sufficient to comply with this requirement. It is als ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
