TMI Blog2011 (11) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... t:- It is not clear as to how the assessee had arrived at relief of 5.25%. However, ITAT has allowed benefit of deduction of 5% under proviso to section 92C(2) and in view of the decision in case of Symantec Software Solutions (P.) Ltd. v. Asstt. CIT (2011 (5) TMI 107 - ITAT MUMBAI) no separate adjustment is required on account of risk functional difference. Therefore, this plea of the assessee is dismissed. Computation of the arm's length range – Held that:- When there are two prices determined by the most appropriate method, the first step is to take the arithmetical mean of such prices as ALM. Assessee has the option to adjust the above ALM by ±5%. However, in present case the arithmetical mean of two prices (price determined by A.O. & assessee) has not been done. For this purpose, this issue is restored to the file of the AO, who shall in turn, may refer the matter to the TPO - Decided partly in favor of assessee. - IT APPEAL NOS. 398 & 418 (BANG.) OF 2008 - - - Dated:- 9-11-2011 - N.K. SAINI, GEORGE GEORGE K., JJ. Rajan Vora for the Appellant. Etwa Munda for the Respondent. ORDER George George K., Judicial Member This Miscellaneous Application fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputers Services Limited should not be accepted as a comparable; (ii) Rejection of comparable companies with margins less than 6% (including comparable companies with negative margins); (iii) Request for Risk Adjustment and (iv) Computation of the arm's length range. 7. Now let us take up each issue separately. (1) Satyam Computers Services Limited should not be accepted as a comparable (Page nos.67-69, Para Nos.91-93 In the order, the Tribunal has worked out the ALP/the arithmetical mean of the comparables shortlisted out of the comparables identified by the TPO/Assessee as follows:- "The arithmetic mean will be worked out on the basis of combined list of both TPO/AO and the assessee company, comprising 12 comparables. The necessary working is made out below: S. No. Name of the Company Margins (In %) 1. ADCC Research Computing Centre Ltd., 40.96 2. Compudyne Winfo Systems Ltd. 21.65 3. Kashyap Radiant Systems Ltd. 13.27 4. Lanco Global Systems 20.91 5. Larsen Toubro Infotech Ltd. 6.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the assessee. Consequently, Satyam, which reported a turnover of Rs.2023.65 crores was excluded from the lists of comparable companies as it did not fall within the above turnover range. The above selection criterion adopted by the TPO was upheld by the CIT(A) vide order dated 28th January, 2008, disregarding the submissions made by the assessee that the turnover filter adopted by the TPO should not be used in identifying comparable companies. The Tribunal in the process of arriving at the final list of comparable companies for determining the ALP, combined the separate lists prepared by TPO/CIT(A) and the assessee and finally determined 12 companies in all, including Satyam, which was picked from and formed part of the assessee's set in its original transfer pricing study undertaken in 2003. 7.2.1 In this regard, we have to mention that Satyam was already excluded in the lists of comparable companies by the TPO as well as by the CIT(A), therefore, neither ground nor written submission could have been raised for its exclusion before the Tribunal. The assessee's ground/prayer before the Tribunal was that adoption of turnover filter by the TPO to identify the new list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative. Therefore, we are inclined to exclude those comparables having very low margin. Then what should be the cut of rate? The assessee has agreed for a working contract of cost + 6%. Therefore, as a reasonable profit level indicator (PLI), we hold that all the comparables, having margin less than 6%, have to be excluded from the list relied on by the assessee. Accordingly, the following comparables are excluded from the assessee's list: Sl. No. Name of the Company Margins (In %) 1. Bangalore Softsell Ltd. 2.27 2. Cherry Soft Technologies Ltd. 3.67 3. Goldstone Technologies Ltd. 5.37 4. Mascot Systems 5.59 5. Unitech Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. It was submitted that while arriving at the ALP/arithmetical mean of prices, the Tribunal has not considered the assessee's plea that "the lower authorities have also erred in law and facts by not making suitable adjustments to account for the differences in the risk profile of the comparable companies and the assessee". It was further submitted that in view of the limited functions performed and limited risk borne by the assessee in respect of the provision of software services, the assessee can be characterized as a contract service provider operating in a risk mitigated environment, whereas the comparable companies was functioning "entrepreneurial risk taking functions". It was submitted that the TP regulations in India recognize that adjustments should be made for the differential risks; however, they did not provide any specific methodology for making such adjustments. The assessee relied on the decision in the case of Philips Software Centre (P.) Ltd. v Asstt. CIT [2008] 26 SOT 226 (Bang.) and submitted that the Tribunal ought to have been provided risk adjustment relief while computing the margins of comparable companies. Accordingly it was pleaded that the ALP should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired on account of risk and functional differences. Therefore, we do not find any merit and substance in the claim of the assessee for adjustment in respect of risk and functional differences". In the instant case, the ITAT has allowed benefit of deduction of 5% (para 64) under proviso to section 92C(2) and in view of the decision of ITAT, Mumbai (supra), no separate adjustment is required on account of risk functional difference. Therefore, this plea of the assessee is dismissed. Computation of the arm's length range (Page No.44-45, para no.63) 10. While interpreting proviso to section 92C(2) of the Act, the Tribunal has made the following observations in the order:- " .at the option of the assessee, the assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean i.e. the assessee has an option to claim the tax payer's marginal relief at 5% with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the assessee and the Average Mean Margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5%. For e.g. in a case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 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, adjustment of transfer pricing would be 5.90% instead of 5.74 as claimed by the assessee. 10.3 We have heard the rival submissions and perused the material on record. When there are two prices determined by the most appropriate method, the first step is to take the arithmetical mean of such prices as ALM. However, the assessee has the option to adjust the above ALM by 5%. Here, the two different prices are - By the A.O. - 20.57 By the assessee - 8.80 The adjustment of 5% is done on assessee's computation to arrive at 13.80%. The relevant finding of the Tribunal at para 98 of the impugned order reads as follows:- "The Assessing Authority will further find out the operating profits at assessee's rate of 13.80% and the operating profits at the arithmetic mean rate of 20.57% on the basis of the revised revenue and cost computed in paragraph above. The differ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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