Tribunal excludes Satyam as comparable, rejects margin plea & risk adjustment, instructs AO on arm's length range calculation

The Tribunal partially allowed the Miscellaneous Petition by directing that Satyam Computers Services Limited should not be considered as a comparable due to unreliable financial data. The plea to exclude companies with margins less than 6% was rejected, as was the request for a risk adjustment. The Tribunal instructed the AO to recompute the arm's length range by considering the arithmetical mean of prices of comparable companies, not the assessee's transfer price.

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Issues Involved:
1. Acceptance of Satyam Computers Services Limited as a comparable.
2. Rejection of comparable companies with margins less than 6% (including negative margins).
3. Request for Risk Adjustment.
4. Computation of the arm's length range.

Detailed Analysis:

1. Acceptance of Satyam Computers Services Limited as a Comparable:
The Tribunal initially included Satyam Computers Services Limited in the list of comparables for determining the Arm's Length Price (ALP). However, the assessee argued that Satyam should not be considered due to the unreliability and falsification of its audited financial statements, which became publicly known in January 2009. The Tribunal acknowledged that Satyam's financial data was unreliable and noted that other tribunals had also excluded Satyam for similar reasons. Therefore, the Tribunal directed that Satyam should not be taken as a comparable, allowing the assessee's plea.

2. Rejection of Comparable Companies with Margins Less Than 6% (Including Negative Margins):
The Tribunal excluded comparables with very low margins, reasoning that extreme cases should be avoided to ensure representativeness. The Tribunal noted that the assessee's agreement with its German associate contemplated a compensation of cost plus 6%, and thus, comparables with margins less than 6% were excluded. The assessee argued that this methodology would always result in an upward ALP adjustment, but the Tribunal held that it had taken a conscious decision based on the facts and circumstances of the case. Consequently, this plea of the assessee was rejected.

3. Request for Risk Adjustment:
The assessee requested a risk adjustment, arguing that it operated in a risk-mitigated environment compared to the entrepreneurial risk-taking functions of the comparables. The Tribunal noted that the assessee did not provide a working risk adjustment in its transfer pricing study, nor did the AO/TPO grant any risk adjustment. The Tribunal referred to the ITAT Mumbai decision in Symantec Software Solutions (P.) Ltd. v. Asstt. CIT, which held that no separate adjustment is required on account of risk and functional differences when the benefit of a 5% standard deduction under proviso to section 92C(2) is allowed. Accordingly, the Tribunal dismissed this plea of the assessee.

4. Computation of the Arm's Length Range:
The Tribunal interpreted the proviso to section 92C(2) of the Act to mean that the assessee could adopt a price different from the arithmetical mean by an amount not exceeding 5% of such mean. The Tribunal allowed the assessee a standard deduction of 5%, increasing the operating margin to 13.80%. However, the assessee argued that the arm's length range of +/- 5% should be computed from the arithmetical mean of the prices of the comparable companies, not the assessee's transfer price. The Tribunal restored this issue to the AO for recomputation, directing the AO to refer the matter to the TPO if necessary.

Conclusion:
The Tribunal partly allowed the Miscellaneous Petition, directing that Satyam should not be included as a comparable, rejecting the plea regarding the exclusion of comparables with margins less than 6%, dismissing the request for risk adjustment, and restoring the issue of computing the arm's length range to the AO.

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