2013 (11) TMI 224 - AT - Income Tax

Tribunal adjusts TP ratio, rejects risk claim & +/-5% adjustment, partly allows appeal for accurate ALP determination.

The Tribunal directed the A.O. to recompute the TP adjustment by adopting the cost-plus ratio of 15.80% of IDC (India) Limited as against 12.6% shown by ... Adjustment of arm's length price - Rejection of comparables - Held that:- 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 - 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 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 bank lending rates and risks involved as claimed by the assessee. It was held by the Tribunal that all the companies conducting business will have the same risk i.e. market risk, customer risk, government policy risk etc. associated with conducting business. It was also held that unless the risk is quantified in certain objective manner and can be represented by way of numbers, it is very difficult to make adjustment on presumptions and surmises - assessee has failed to quantify the risk adjustment by bringing certain real and accurate facts relating to the difference in risk assumed by the assessee vis-à-vis the comparable and in the absence of the same, its claim for risk adjustment cannot be allowed as rightly held by the authorities below. We therefore find no merit in assessee's claim for the benefit of ± 5% adjustment as well as for risk adjustment and reject the same - Decided against assessee. Issues Involved:1. Transfer Pricing Adjustment2. Selection of Comparable Companies3. Risk Adjustment4. Benefit of +/-5% Adjustment under Proviso to Section 92C(2)Detailed Analysis:1. Transfer Pricing Adjustment:The appeal concerns an addition of Rs. 13,10,03,941/- made to the total income of the assessee on account of Transfer Pricing (TP) adjustment by the Assessing Officer (A.O.). The assessee, a company providing investment advisory services to its holding company GASC LLC, received Rs. 26,31,02,420/- for its services. The A.O. referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of these transactions. The TPO identified eight comparable companies and determined an average profit margin of 68.66% compared to the assessee's 12.5%, leading to the TP adjustment.2. Selection of Comparable Companies:The assessee proposed five additional comparables, which were rejected by the TPO, who relied on the eight comparables confirmed by the Dispute Resolution Panel (DRP) in the preceding year. The DRP upheld the TPO's selection, concluding that the activities of the assessee were akin to merchant and investment banking, thus justifying the comparables.3. Risk Adjustment:The assessee claimed a risk adjustment, arguing that it was a captive service provider with limited risk. The TPO and DRP rejected this claim, stating that the risk undertaken by independent enterprises was equivalent to the single customer risk assumed by the assessee. The Tribunal noted that the assessee had not provided a scientific method for quantifying the risk adjustment and that the difference between prime lending rate and bank rate was not a recognized method for such adjustments. The Tribunal also referred to previous cases where similar claims were rejected for lack of quantifiable data.4. Benefit of +/-5% Adjustment under Proviso to Section 92C(2):The assessee sought the benefit of +/-5% adjustment as per the proviso to section 92C(2). The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2006-07, held that this benefit was not available since only one comparable (IDC India Ltd.) was considered. The Tribunal emphasized that the proviso applies when more than one price is determined by the most appropriate method.Conclusion:The Tribunal directed the A.O. to recompute the TP adjustment by adopting the cost-plus ratio of 15.80% of IDC (India) Limited as against 12.6% shown by the assessee. The Tribunal rejected the assessee's claim for risk adjustment and the benefit of +/-5% adjustment under the proviso to section 92C(2). The appeal was partly allowed, focusing on the accurate determination of the ALP based on the single comparable accepted.