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TMI Blog2013 (11) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with its AEs. The transfer pricing adjustment accordingly has to be recomputed by adopting the operating profit to cost ratio of 15.8% of IDC (India) Limited as against 12.6% shown by the assessee - Decided in favour of assessee. Adjustment as per the proviso to section 92C(2) - Benefit of ± 5% - Held that:- 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 also observed that in the case of Wills Processing Services (India) (P.) Ltd. (2013 (6) TMI 532 - ITAT MUMBAI) similar method was sought to be used by the assessee for risk adjustment and the same was rejected by the Tribunal holding that there is no corelation between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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/s 92C(1) of the Act for determining the Arm's Length Price (ALP) of such transactions. According to the TPO, the activities of the assessee-company were akin to that of investment advisory services and not of routine business support services. Accordingly, he identified eight comparable companies which were forming part of the final comparable set of eight companies taken in the immediately preceding year i.e. A.Y. 2006-07. He noted that the average profit margin of the said eight comparable companies was 89.23% as against the mark-up of 12.5% shown by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 services to G.A, Group company, namely, GASC LLC. The Indian company takes limited risks and is remunerated on cost plus markup basis. (iv) GAPL gets compensated at full cost plus markup by GASC LLC for the above services. Its activities are primarily limited to analyzing Investment opportunity, providing recommendations and advice on the basis of Information collected. (v) GAPL is insulated from all business and operational risks and bears only manpow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that GAPL, being the service provider, should be allowed this risk premium. (xiii) As an alternative methodology, the AR contended the GAPL market risk adjustment should be calculated using CAPM. If risk Adjustment is calculated using CAPM, then the arithmetic mean should be 64.66% instead of 68.66%." 5. After taking into consideration the submissions made on behalf of the assessee as well as the contents of the TPO's order, the DRP proceeded to deal with the objections raised by the assessee. In this regard, DRP referred to the regulations related to the application and use of comparables establishing the ALP and summarized the same briefly in the order as under:- "(i) The identification of comparable transactions and or companies, to be used in the selection and application of the most appropriate transfer pricing method for the international transactions, is central to the transfer pricing analysis. (ii) Rule 10(B) of the Income Tax Rules, 1962, provides that the comparability of international transaction, with an uncontrolled transactions, shall be judged with respect to the specific characteristics of the property transferred or services provided in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar set of eight comparables was taken in the case of the assessee by the A.O./TPO for A.Y. 2006-07 and the Tribunal while disposing of the appeal of the assessee for A.Y. 2006-07 vide its order dtd. 31-1-2013 passed in ITA No. 8914/Mum/2010 has accepted only one comparable viz. IDC (India) Limited. He pointed out that the profit margin of IDC (India) Limited for the year under consideration i.e. 2007-08 was 15.80% as against the profit margin of the assessee-company of 12.6%. He submitted that the assessee, however, is entitled for the benefit of 5% adjustment as per proviso to section 92C(2) but the Tribunal has not allowed such adjustment for A.Y. 2006-07 on the ground that the comparable price was only one. He contended that the decision of the Tribunal on this issue is not acceptable because no opportunity of being heard was given to the assessee on this point while passing the order for A.Y. 2006-07. He contended that the relevant proviso is in two parts out of which one part, which supports the case of the assessee, has not be considered by the Tribunal. He contended that even the amendment made subsequently supports the stand of the assessee on this issue. He further conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the different risks undertaken by different parties and analyse the same comparatively in order to make accurate adjustment. He contended that eight different risks are identified in the TP study furnished by the assessee itself and it is unimaginable to say that the assessee has not taken any of such risks. He contended that in order to make accurate adjustment on account of risk, the risk profiling of the assessee as well as comparable needs to be carried out, but such exercise has not been done by the assessee. He submitted that neither the Indian law nor even OECD guidelines provides any method for making risk adjustment. 10. As regards the working of risk adjustment furnished by the assessee at page 213 of the assessee's paper book, he submitted that the same is not based on any scientific method. He also pointed out that a similar working furnished by the assessee in support of its claim for risk adjustment has not been accepted by the Tribunal in the case of Wills Processing Services (India) (P.) Ltd. v. DCIT in its order dtd. 7-12-2012 in ITA No. 8772/Mum/2010 for A.Y. 2006-07 and in the case of Marubeni India (P.) Ltd. vide its order dtd. 18-3-2011 passed in ITA No. 809 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. We have considered the rival submissions and also perused the relevant material available on record. It is observed that a set of 8 comparables was taken by the TPO for the TP study in order to determine the ALP of the international transactions of the assessee company with its AEs relying on the assessment for the immediately preceding year in assessee's own case wherein similar set of eight comparables was confirmed by the DRP. As agreed by the ld. representatives of both the sides, the matter as involved in A.Y. 2006-07 has already been decided by the Tribunal accepting only one out of the eight comparables selected by the TPO/DRP namely IDC (India) Limited. Since the facts involved in the year under consideration are similar to A.Y. 2006-07 inasmuch as the set of eight comparables was taken by the TPO relying on the assessment for A.Y. 2006-07, we respectfully follow the order of the Tribunal passed on similar issue for A.Y. 2006-07 and hold that IDC (India) Limited is the only comparable company which is to be taken for the comparable study in order to determine the ALP of the transactions of the assessee with its AEs. The transfer pricing adjustment accordingly has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the language of amended proviso to section 92C(2) of the Act makes it clear that the ALP shall be taken to be in the range of 5% of more than one comparable prices and since there was only one comparable considered in the case of the assessee, the benefit under the said proviso would not be available. Respectfully following this decision of the co-ordinate Bench of this Tribunal in assessee's own case for A.Y. 2006-07, we hold that there being only one comparable that is considered in the case of the assessee for the year under consideration, the benefit of 5% adjustment under the proviso to section 92C(2) of the Act would not be available to the assessee. 16. As regards the claim of the assessee for risk adjustment, it is observed that a similar claim of the assessee was not accepted by the Tribunal in A.Y. 2006-07 on the ground that no quantification of such adjustment was made by the assessee by comparing actual quantitative difference of the assessee with that of the comparables. It was held that such adjustment, in any case, could be made only when some real and accurate effect of the difference in assets employed and risk assumed are brought on record. As submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order which is reproduced below:- "6.6 The assessee has further sought Risk Adjustment in respect of being a captive risk free entity. The risk adjustment has been computed by way of difference in the PLR and the bank rate. As already mentioned assessee is expressed to the same risks as the comparables, if it fails to deliver the goods, it also faces the risk of being closed down, or being out of business. The claim of the assessee is further analyzed as under: 6.6.1 Whether Difference between the bank rate and PLR can determine the Rate of Risk in case of a Non-Banking Business:- The types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc. It is believed that generally the banks face Credit, Liquidity and reputation risks. In a bank's portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Credit risk emanates from a bank's dealing with individuals, corporate, financial institutions or a sovereign. For most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls short squarely to measure and manage the risk. Capital Asset Pricing Model is generally used in investment analysis by economists, investment advisors as well as investment bankers. The CAPM is also often used to measure the performance of mutual funds and other managed portfolios. The CAPM builds on the model of portfolio choice developed by Harry Markowitz's (1959). In Markowitz's model, an investor selects a portfolio at time t-l that produces a stochastic return at t. The model assumes investors are risk averse and, when choosing among portfolios, they care only about the mean and variance of their one-period investment return. Unrealistic Assumptions of CAP Model 1. All investors have rational expectations. 2. There are no arbitrage opportunities. 3. Returns are distributed normally. 4. Fixed quantity of assets. 5. Perfectly efficient capital markets. 6. Investors are solely concerned with level and uncertainty of future wealth 7. Separation of financial and production sectors. 8. Thus, production plans are fixed. 9. Risk free rates exist with limitles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nationalising their operations, these MNCs are decreasing the risk. Many studies have been conducted to see how the degree of multinationality produces additional benefits in terms of excess returns or reduced risk and it is found that the degree of multinationality did not have a significant influence on the risk and return performance of the MNCs (Degree of Multinationality and Financial Performance: A Study of U.S.-Based Multinational Corporations by Khursheed Omer, David Durr and Philip Siegel) Single customer risk: The taxpayer has to bear 'single customer risk' for being a captive service provider, which to a great extent offsets the benefits of taxpayer being not exposed to market risk. The concept of dealing with a single customer and the inherent risks involved have been discussed by M/s Infosys Technologies Ltd in its audit report for the year 2004-05 as under (page 95): Client concentration: We rely on repeat business based on the strength of our client relationships and a major portion of our revenues come from existing key clients. As the size of a client increases, it limits our pricing flexibility, strengthens the clients' negotiati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Risk The taxpayer has a cost plus arrangement, which means benefits of the savings on account of increased efficiency, cost cuttings or increase in turnover etc does not accrue to the taxpayer. It offsets the benefit of not taking the pricing risk. An independent enterprise gets profit in addition to the costs. The main issue is that the taxpayer has not been adequately remunerated on par with the comparables, which is the essence of the transfer pricing i.e. if the taxpayer and its AE is to perform the functions in uncontrolled conditions, what would have been the margin earned by the taxpayer. As discussed in detail as above the risk undertaken by independent enterprises is equivalent to the single customer risk undertaken by the taxpayer. Hence, there is not much difference in risks assumed by the taxpayer and also by the comparables. So, the argument of the taxpayer that the taxpayer earns less when compared to its AE is without any basis." It is no doubt true that the DRP has not passed a well discussed order on this issue. However, the DRP has clearly stated of having agreed with the view of the TPO on this issue thereby adopting the same ..... X X X X Extracts X X X X X X X X Extracts X X X X
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