GENERAL ATLANTIC PVT. LTD., MUMBAI V. A.C.I.T. (OSD) CIRCLE 3(1), MUMBAI

ITA 7638/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3401 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-03-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 11-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K JAIN
• Assessee Lawyers: PORUS F KAKA
• Keywords: Capital asset; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Wholly owned subsidiary
• Section: 92C; 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , .. , BEFORE SHRI D. MANMOHAN, V.P. AND SHRI P.M. JAGTAP, AM ./ I.T.A. NO. 7638/MUM/2011 ( / ASSESSMENT YEAR : 2007-08) GENERAL ATLANTIC PRIVATE LIMITED, 17 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI 400 021. / VS. THE ASSTT. COMMISSIONER OF INCOME TAX- (OSD), CIRCLE 3(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. ' . / PAN : AABCG7917Q ( '# / APPELLANT ) .. ( $%'# / RESPONDENT ) '# & ' / APPELLANT BY : SHRI PORUS F. KAKA $%'# & ' / RESPONDENT BY : SHRI A.K. JAIN ( )* & + / DATE OF HEARING : 06-03-2013 ,-. & + / DATE OF PRONOUNCEMENT : 17-05-2013 / / O R D E R PER P.M. JAGTAP, A.M . : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE ASSESSING OFFICER, I.E. ASSTT. CIT (OSD) CIRCLE 3 (1), MUMBAI DTD. 24-8-2011 PASSED U/S 143(3) R.W.S. 144-C(13) OF THE INCOME TA X ACT, 1961 WHEREBY HE MADE ADDITION OF RS. 13,10,03,941/- TO THE TOTAL IN COME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING (TP) ADJUSTMENT. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS STATED TO BE ENGAGED IN THE BUSINESS OF PROVIDING INVESTMENT ADV ISORY SERVICES. IT RENDERS ITA 7638/MUM/2011 2 SERVICES TO GENERAL ATLANTIC SERVICE CORPORATION, U SA (GASC LLC). GASC LLC IS A DELAWARE LIMITED LIABILITY COMPANY WHICH IS EN GAGED IN PROVIDING MANAGEMENT SERVICES TO ITS AFFILIATED LIMITED PARTN ERSHIPS GLOBALLY. IN THE PROCESS OF RENDERING SUCH SERVICES, GASC LLC REQUIR ES CERTAIN INFORMATION ON SPECIFIC INDUSTRIES ALONG WITH THE INFORMATION IN R ELATION 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 ASSESS EE COMPANY COLLECTS NECESSARY INFORMATION TO BE PROVIDED TO GASC LLC IN RELATION TO THE FOLLOWING MATTERS; (I) THE ECONOMIC AND POLITICAL CONDITIONS OF INDI A, (II) THE INFORMATION TECHNOLOGY SECTORS OF THE EC ONOMY OF INDIA (III) PARTICULAR INFORMATION TECHNOLOGY ENTERPRISES IN INDIA (IV) POSSIBLE INVESTMENT OPPORTUNITIES INVOLVING IN FORMATION TECHNOLOGY ENTERPRISES IN INDIA. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C OMPANY RECEIVED A TOTAL AMOUNT OF RS. 26,31,02,420/- ON ACCOUNT OF THE SERV ICES RENDERED TO ITS HOLDING COMPANY GASC LLC AS PER THE SERVICE AGREEME NT AND KEEPING IN VIEW THESE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE CO MPANY WITH ITS ASSOCIATE ENTERPRISE (AE), A REFERENCE WAS MADE BY THE A.O. T O THE TPO U/S 92C(1) OF THE ACT FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF SUCH TRANSACTIONS. ACCORDING TO THE TPO, THE ACTIVITIES OF THE ASSESSE E COMPANY WERE AKIN TO THAT OF INVESTMENT ADVISORY SERVICES AND NOT OF ROUTINE BUSINESS SUPPORT SERVICES. ACCORDINGLY, HE IDENTIFIED EIGHT COMPARABLE COMPANI ES 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 A GAINST THE MARK-UP OF 12.5% SHOWN BY THE ASSESSEE OVER AND ABOVE THE TOTA L COST. HE THEREFORE REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE A VERAGE PROFIT MARGIN OF ITA 7638/MUM/2011 3 89.23% SHOULD NOT BE CONSIDERED IN ITS CASE FOR DET ERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SE (AE). 3. THE ASSESSEE TOOK A FRESH SEARCH BY USING THE SA ME PARAMETERS AND FILTERS, AS WERE USED IN THE LAST CONCLUDED ASSESSM ENT AND IDENTIFIED THE FOLLOWING ADDITIONAL FIVE COMPARABLE COMPANIES BASE D ON THE SAID SEARCH:- SL NO. NAME OF THE COMPANY DATABASE F.Y 2006-07 1 AGRIMA CONSULTANTS INTERNATIONAL LTD. PROWESS 0.69% 2 CRISIL RISK & INFRASTRUCTURE SOLUTIONS LTD. PROWESS - 22.66% 3 I C R A MANAGEMENT CONSULTING SERVICES LTD. PROWESS 15.86% 4 MECKLAI FINANCIAL & COMMERCIAL SERVICES LTD. PROWESS 6.53% 5 RITES LTD. PROWESS 31.11% THE ABOVE FIVE ADDITIONAL COMPARABLES PROPOSED BY T HE ASSESSEE WERE REJECTED BY THE TPO ON THE GROUND THAT THE FINAL SET OF EIGH T COMPARABLES SELECTED BY HIM IN THE IMMEDIATELY PRECEDING YEAR WAS CONFIRMED BY THE DISPUTE RESOLUTION PANEL (DRP). HE ALSO REJECTED THE RISK ADJUSTMENT CLAIMED BY THE ASSESSEE BEING CAPITAL AND RISK FREE ENTITY FOR THE DETAILED REASONS GIVEN IN HIS ORDER ON THE BASIS OF WHICH HE CAME TO THE CONCLUSI ON THAT THE RISK UNDERTAKEN BY INDEPENDENT ENTERPRISES IS EQUIVALENT TO THE SINGLE CUSTOMER RISK UNDERTAKEN BY THE ASSESSEE. HE HELD THAT THER E WAS THUS NOT MUCH DIFFERENCE IN THE RISK ASSUMED BY THE ASSESSEE AND BY THE COMPARABLES TO JUSTIFY ANY RISK ADJUSTMENT AS SOUGHT BY THE ASSESS EE. THE TPO, HOWEVER, ACCEPTED THE STAND OF THE ASSESSEE THAT THE SINGLE YEAR AVERAGE OPERATING PROFIT TO COST OF THE EIGHT COMPARABLES WAS ACTUALL Y 68.66% AND APPLYING THE SAME TO THE COST SHOWN BY THE ASSESSEE, THE ALP WAS WORKED OUT BY THE TPO AT RS. 16,04,37,227/- AS AGAINST RS. 2,94,33,286/- SHOWN BY THE ASSESSEE. ACCORDINGLY, THE DIFFERENCE OF RS. 13,10,03,941/- W AS DETERMINED BY HIM AS A ITA 7638/MUM/2011 4 TRANSFER PRICING ADJUSTMENT REQUIRED TO BE MADE TO THE TOTAL INCOME OF THE ASSESSEE IN THE ORDER DTD. 26-10-2010 PASSED U/S 92 CA (3) OF THE ACT. 4. AS PER THE ORDER PASSED BY THE TPO U/S 92CA(3) O F THE ACT ADDITION OF RS. 13,10,03,941/- WAS PROPOSED BY THE A.O. ON ACCO UNT OF T.P. ADJUSTMENT IN THE DRAFT ASSESSMENT ORDER AND THE SAME WAS FORW ARDED BY HIM TO THE ASSESSEE. THE ASSESSEE RAISED VARIOUS OBJECTIONS A GAINST THE SAID DRAFT ASSESSMENT ORDER SUGGESTING THE VARIATION IN ITS IN COME WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT. ELABORATE SUBMISSIONS WERE MADE BEFORE THE DRP ON BEHALF OF THE ASSESSEE IN SUPPORT OF ITS STA ND ON THIS ISSUE WHICH, AS SUMMARIZED BY THE DRP, WERE AS UNDER:- (I) THE TAXPAYER SUBMITTED THAT THE TPO DID NOT UN DERSTAND 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 FO R 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 MARK UP BASIS. (IV) GAPL GETS COMPENSATED AT FULL COST PLUS MARK UP BY GASC LLC FOR THE ABOVE SERVICES. ITS ACTIVITIES ARE PRIMARIL Y LIMITED TO ANALYZING INVESTMENT OPPORTUNITY, PROVIDING RECOMMENDATIONS A ND ADVICE ON THE BASIS OF INFORMATION COLLECTED. (V) GAPL IS INSULATED FROM ALL BUSINESS AND OPERAT IONAL RISKS AND BEARS ONLY MANPOWER AND GENERAL BUSINESS RISK FOR I TS OPERATIONS IN INDIA. (VI) GAPLS PROFILE IS CLEARLY DISTINGUISHED FROM FULL FLEDGED ENTREPRENEUR WHICH BEARS ALL BUSINESS AND MARKET RI SKS AND HAS SIGNIFICANT INTANGIBLES. (VII) HENCE, GAPL SHOULD BE CHARACTERIZED A LOW RIS K INVESTMENT PROVIDER. (VIII) THE COAST PLUS MARK UP OF 12.5%, CHARGED BY GAPL TO GASC LLC IS AT ARMS LENGTH RATE. ITA 7638/MUM/2011 5 (IX) ACTIVITIES OF INVESTMENT BANKS, TAKEN BY THE T PO AS COMPARABLES, ARE NOT GOOD COMPARABLES TO GAPL. (X) THE AR POINTED OUT THAT THE TPO/ASSESSING OFFIC ERS ORDER SUFFERS FROM THE FOLLOWING INFIRMITIES: - HE SUMMARILY REJECTED THE COMPARABLES IDENTIFIED IN THE TP REPORT AND ISSUED A SHOW CAUSE NOTICE, SELECTING THE FINAL COMPARABLES USED IN AY 2006-07. - SUMMARILY REJECTED THE ADDITIONAL COMPARABLES IDE NTIFIED BY GAPL, BASED ON THE RE-RUN OF THE SEARCH UNDERTAK EN. - SELECTED THE COMPARABLES SELECTED BY THE TPO FOR AY 2006-07, WHICH WERE SUBSEQUENTLY CONFIRMED BY THE D RP. - REJECTED THE ARGUMENTS RELATED TO ADJUSTMENT ON A CCOUNT OF RISK, BETWEEN COMPARABLE COMPANIES AND GAPL. - BASED THEREON, THE ARITHMETIC MEAN OF COMPARABLES WAS COMPUTED AT 68.66%, RESULTING IN AN ADJUSTMENT OF RS.13.10 CRORES. ERRONEOUS REJECTION OF TRANSFER PRICING STUDY. - TPO GROSSLY ERRED IN REJECTING TRANSFER PRICING STU DY REPORT PREPARED BY GAPL WITHOUT PROVIDING REASONABLE BASIS AS REQUIRED UNDER SECTION 92C(3) OF THE ACT. - TPO ERRED IN FAILING TO INFORM GAPL AS TO HOW THE DOCUMENTATION MAINTAINED AND THE DATA USED IN COMPUTATION OF ARMS LENGTH PRICE IS NOT RELIABLE O R 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 2OO6-O7 WITHOUT UNDERTA KING NEW SEARCH. THIS CHERRY PICKING WAS NOT ACETATED TO TH E TAXPAYER. THE COMPARABLES SELECTED BY THE TPO SHOULD BE TREAT ED AS ERRONEOUS AND NOT GOOD AND WORTHY COMPARABLES. ITA 7638/MUM/2011 6 (XII) THE AR ALSO QUESTIONED THE ACTION OF THE IPO IN NOT MAKING ADJUSTMENT FOR MARKET RISK, FOR THE COMPARABLES SEL ECTED. HE STATED THAT GAPL, BEING THE SERVICE PROVIDER, SHOUL D BE ALLOWED THIS RISK PREMIUM. (XIII) AS AN ALTERNATIVE METHODOLOGY, THE AR CONTENDED THE GAPL MARKET RISK ADJUSTMENT SHOULD BE CALCULATED USING C APM. IF RISK ADJUSTMENT IS CALCULATED USING CAPM, THEN THE ARITH METIC 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 TPOS ORDER , THE DRP PROCEEDED TO DEAL WITH THE OBJECTIONS RAISED BY THE ASSESSEE. IN THI S REGARD, DRP REFERRED TO THE REGULATIONS RELATED TO THE APPLICATION AND USE OF C OMPARABLES 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 TRANS ACTIONS, IS CENTRAL TO THE TRANSFER PRICING ANALYSIS. (II) RULE 10(B) OF THE INCOME TAX RULES, 1962, PROV IDES THAT THE COMPARABILITY OF INTERNATIONAL TRANSACTION, WITH AN UNCONTROLLED TRANSACTIONS, SHALL BE JUDGED WITH RESPECT TO THE S PECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE TRANSACTION, OR THE FUNCTIONS PREFORMED BY THE RESPECTIVE PARTIES, AS EVIDENT FROM AN OBJECTION FAR ANALYSIS, OR THE CONTRACTUAL TERMS GO VERNING THE TRANSACTION, OR THE PREVAILING MARKET CONDITIONS WH ICH INFLUENCE THE TRANSACTIONS BETWEEN THE RELATED PARTIES. (III) AFTER IDENTIFICATION THE UNCONTROLLED TRANSAC TIONS/COMPARABLES, THE NEXT STEP IS TO UNDERTAKE A COMPARABILITY ANALY SIS, TO ENSURE THAT ANY ADJUSTMENT ACHIEVES RESULTS THAT WOULD HAVE BEE N REALIZED BY INDEPENDENT ENTITIES IN COMPARABLE CIRCUMSTANCES. (IV) ANY EFFORT TO CHERRY PICK COMPARABLES, IS DETR IMENTAL TO THE DETERMINATION OF THE ALP. (V) RULE 10(B) OF THE RULES STATES THAT AN UNCONTRO LLED TRANSACTION/ENTERPRISE SHALL BE COMPARABLE TO AN IN TERNATIONAL TRANSACTION/ENTERPRISE SHALL BE COMPARABLE TO AN IN TERNATIONAL TRANSACTION/ENTERPRISE, IF NONE OF THE DIFFERENCE B ETWEEN THE TWO ARE LIKELY TO MATERIALLY AFFECT THE PRICES OR PROFITS A ND THAT THE TWO SHALL BE COMPARABLE IF REASONABLY ACCURATE ADJUSTMENTS CAN B E MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ADJUSTMENTS CAN BE ITA 7638/MUM/2011 7 MADE ONLY TO ELIMINATE THE IMPACT OF DIFFERENCES ON ALP AND NOT TO WINDOW DRESS THE CHERRY PICKED COMPARABLES. 6. KEEPING IN VIEW THE RELEVANT REGULATIONS AS SUMM ARIZED ABOVE AND HAVING REGARD TO THE FACTS OF THE CASE, THE DRP HEL D THAT THE ACTIVITIES OF THE ASSESSEE WERE AKIN TO MERCHANT BANKING AND INVESTME NT BANKING AND THE EIGHT COMPARABLES SELECTED BY THE A.O./TPO WERE COR RECT. THE DRP ALSO AGREED WITH THE TPO IN THE MATTER OF RISK ADJUSTMEN T 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% ADJUST MENT IN TERMS OF THE PROVISO TO SECTION 92 C(2) OF THE ACT. ACCORDINGLY DIRECTIONS WERE GIVEN BY THE DRP TO THE A.O. U/S 144C(5) OF THE ACT VIDE ORDER D TD. 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/-. A GGRIEVED BY THE ORDER OF THE A.O. PASSED U/S 143(3) R.W.S. 144C(13), THE ASS ESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL DISPUTING THE ADDITION M ADE THEREIN ON ACCOUNT OF TP ADJUSTMENT. 7. THE COUNSEL FOR THE ASSESSEE, AT THE OUTSET, SUB MITTED THAT A SIMILAR SET OF EIGHT COMPARABLES WAS TAKEN IN THE CASE OF THE A SSESSEE BY THE A.O./TPO FOR A.Y. 2006-07 AND THE TRIBUNAL WHILE DISPOSING O F 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 TH E PROFIT MARGIN OF THE ASSESSEE COMPANY OF 12.6%. HE SUBMITTED THAT THE AS SESSEE, HOWEVER, IS ENTITLED FOR THE BENEFIT OF +-5% ADJUSTMENT AS PER PROVISO TO SECTION 92C(2) BUT THE TRIBUNAL HAS NOT ALLOWED SUCH ADJUSTMENT FO R A.Y. 2006-07 ON THE GROUND THAT THE COMPARABLE PRICE WAS ONLY ONE. HE C ONTENDED THAT THE ITA 7638/MUM/2011 8 DECISION OF THE TRIBUNAL ON THIS ISSUE IS NOT ACCEP TABLE BECAUSE NO OPPORTUNITY OF BEING HEARD WAS GIVEN TO THE ASSESSE E ON THIS POINT WHILE PASSING THE ORDER FOR A.Y. 2006-07. HE CONTENDED TH AT 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 T HE ASSESSEE ON THIS ISSUE. HE FURTHER CONTENDED THAT THE TRIBUNAL IN A .Y. 2006-07 HAS ALSO NOT ALLOWED THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTME NT ON THE GROUND THAT NO QUANTIFICATION OF SUCH ADJUSTMENT WAS MADE BY THE A SSESSEE. IN THIS REGARD, HE INVITED OUR ATTENTION TO THE WORKING GIVEN AT PA GE 213 AND 214 OF ASSESSEES PAPER BOOK TO SUBMIT THAT KEEPING IN VIE W THE SAID WORKING FURNISHED BY THE ASSESSEE QUANTIFYING THE RISK ADJU STMENT, THE MATER MAY BE SENT BACK TO THE A.O. FOR GIVING APPROPRIATE RISK A DJUSTMENT TO THE ASSESSEE AFTER NECESSARY VERIFICATION. HE SUBMITTED THAT TH E ASSESSEE WHICH IS DEALING WITH ONLY CUSTOMER I.E. ITS HOLDING COMPANY HAS NOT TAKEN ANY MARKET RISK AND THIS POSITION CANNOT BE DISPUTED. HE CONTENDED THAT THE IDC (INDIA) LIMITED, ON THE OTHER HAND, IS DEALING WITH THIRD P ARTIES AND ASSUMES THE MARKET RISK JUSTIFYING THE CLAIM OF THE ASSESSEE FO R RISK ADJUSTMENT. 8. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT ONLY ONE COMPANY VIZ. IDC (INDIA) LIMITED HAS BEEN ACCEPTED AS COMPARABLE BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 INVOLVING SIMI LAR FACTS. HE CONTENDED THAT IF THERE IS ONLY ONE COMPARABLE PRICE AVAILABL E FOR TP STUDY, NO ADJUSTMENT OF 5% CAN BE ALLOWED AS RIGHTLY HELD BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07. HE CONTENDED THAT THE P ROVISO 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. VS . DCIT (2011) 131 ITD 215. 9. AS REGARDS THE CLAIM OF THE ASSESSEE FOR RISK AD JUSTMENT, HE INVITED OUR ATTENTION TO THE RELEVANT PORTION OF THE TP STUDY R EPORT FURNISHED BY THE ASSESSEE AT PAGE 33 OF THE PAPER BOOK TO POINT OUT THAT IDC (INDIA) LIMITED ITA 7638/MUM/2011 9 (SUPRA) WAS IDENTIFIED BY THE ASSESSEE COMPANY ITSE LF 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 FIR ST TIME, IT COULD NOT BE ALLOWED WHEN IT WAS NOT CLAIMED IN THE TP STUDY REP ORT 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 MA DE ONLY WHEN THERE IS MATERIAL DIFFERENCES AND ADJUSTMENT CAN BE ACCURATE LY MADE TO ELIMINATE SUCH DIFFERENCE. HE SUBMITTED THAT THERE ARE DIFFE RENT TYPES OF RISKS INVOLVED IN THE BUSINESS AND IT IS VERY DIFFICULT TO IDENTIF Y THE DIFFERENT RISKS UNDERTAKEN BY DIFFERENT PARTIES AND ANALYSE THE SAM E COMPARATIVELY IN ORDER TO MAKE ACCURATE ADJUSTMENT. HE CONTENDED THAT EIG HT DIFFERENT RISKS ARE IDENTIFIED IN THE TP STUDY FURNISHED BY THE ASSESSE E 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 COMPARABL E 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 PRO VIDES ANY METHOD FOR MAKING RISK ADJUSTMENT. 10. AS REGARDS THE WORKING OF RISK ADJUSTMENT FURNI SHED BY THE ASSESSEE AT PAGE 213 OF THE ASSESSEES PAPER BOOK, HE SUBMITTED THAT THE SAME IS NOT BASED ON ANY SCIENTIFIC METHOD. HE ALSO POINTED OU T THAT A SIMILAR WORKING FURNISHED BY THE ASSESSEE IN SUPPORT OF ITS CLAIM F OR RISK ADJUSTMENT HAS NOT BEEN ACCEPTED BY THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (INDIA) PVT. LTD. VS. DCIT IN ITS ORDER DTD. 7-12-2012 IN I TA NO. 8772/MUM/2010 FOR A.Y. 2006-07 AND IN THE CASE OF M/S MARUBENI INDIA PRIVATE LTD. VIDE ITS ORDER DTD. 18-3-2011 PASSED IN ITA NO. 809/MUM/2009 . RELIANCE WAS ALSO PLACED BY HIM ON THE DECISION OF DELHI BENCH OF ITA T IN THE CASE OF INTERRA INFORMATION TECHNOLOGIES (INDIA) PVT. LTD. VS. DCIT (ITA NOS. 5568/DEL/2010 ITA 7638/MUM/2011 10 & 5680/DEL/2011 ORDER DTD. 31-12-2012) WHEREIN THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTMENT ON THE SIMILAR GROUND WAS REJEC TED BY THE TRIBUNAL HOLDING THAT IN THE ABSENCE OF EXACT DETAILS EXHIBI TED BY THE ASSESSEE, IT IS DIFFICULT TO GIVE ANY BENEFIT ON ACCOUNT OF RISK AD JUSTMENT. 11. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN ITA NO. 5173/MUM/2012 F OR A.Y. 2008-09 VIDE ORDER DTD. 22-2-2013 RELIED UPON BY THE LD. D.R. IN SUPPORT OF THE REVENUES CASE FOR NOT ALLOWING THE +- 5% ADJUSTMENT IS RENDE RED PLACING RELIANCE ON THE ANOTHER DECISION OF THE TRIBUNAL REPORTED IN 131 IT D 215. HE CONTENDED THAT THE SAID DECISION REPORTED IN 131 ITD 215 WAS RENDE RED WITH REFERENCE TO THE OLD PROVISO TO SECTION 92C(2) AND AMENDED PROVISO W AS NOT CONSIDERED. 12. AS REGARDS THE CONTENTION OF THE LD. D.R. THAT NO RISK ADJUSTMENT WAS CLAIMED IN THE TP STUDY REPORT FURNISHED BY THE ASS ESSEE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AVERAGE MARGIN OF THREE YEARS WAS TAKEN INTO CONSIDERATION IN THE SAID TP STUDY REPORT TO ELIMIN ATE THE RISK AND THEREFORE ADJUSTMENT FOR RISK WAS NOT SEPARATELY MADE. HE SUB MITTED THAT THE TPO, HOWEVER, TOOK ONLY THE RELEVANT YEAR DATA AND KEEPI NG IN VIEW THE SAME RISK ADJUSTMENT WAS CLAIMED BY THE ASSESSEE. REFERING T O THE RELEVANT PORTION OF THE TRIBUNALS ORDER FOR 2006-07, HE SUBMITTED THA T A SIMILAR SUBMISSION WAS MADE BY THE ASSESSEE BEFORE THE TRIBUNAL BY SUBMITT ING THAT MULTIYEAR DATA SHOULD BE TAKEN INTO CONSIDERATION TO ELIMINATE THE RISK ADJUSTMENT FACTOR. HE SUBMITTED THAT EVEN BEFORE THE DRP, SPECIFIC OBJ ECTIONS WERE RAISED BY THE ASSESSEE ON RISK ADJUSTMENT BY MAKING ELABORATE SUB MISSION IN THE YEAR UNDER CONSIDERATION, BUT THE DRP HAS REJECTED THE S AME IN ONE LINE WITHOUT GIVING ANY REASON WHATSOEVER. AS REGARDS THE TRIBU NALS 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 RELEVAN T INFORMATION AND DATA WHILE ASSESSEE IN THE PRESENT CASE HAS FURNISHED AL L SUCH INFORMATION AND ITA 7638/MUM/2011 11 DATA EVEN BEFORE THE AUTHORITIES BELOW INCLUDING TH E TPO WHILE CLAIMING THE RISK ADJUSTMENT. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO 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 DETER MINE THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES RELYING ON THE ASSESSMENT FOR THE IMMEDIATELY PRECEDING YEAR I N ASSESSEES OWN CASE WHEREIN SIMILAR SET OF EIGHT COMPARABLES WAS CONFIR MED 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 TRIBUN AL ACCEPTING ONLY ONE OUT OF THE EIGHT COMPARABLES SELECTED BY THE TPO/DRP NA MELY IDC (INDIA) LIMITED. SINCE THE FACTS INVOLVED IN THE YEAR UNDE R CONSIDERATION ARE SIMILAR TO A.Y. 2006-07 INASMUCH AS THE SET OF EIGHT COMPAR ABLES 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 ADJUSTM ENT ACCORDINGLY HAS TO BE RECOMPUTED BY ADOPTING THE OP TO COST RATIO OF 15.8 % OF IDC (INDIA) LIMITED AS AGAINST 12.6% SHOWN BY THE ASSESSEE. 14. THE LD. COUNSEL FOR THE ASSESSEE HAS RAISED TWO ISSUES BEFORE US; ONE RELATING TO ASSESSEES CLAIM FOR RISK ADJUSTMENT AN D THE OTHER RELATING TO THE BENEFIT OF +- 5% ADJUSTMENT AS PER THE PROVISO TO S ECTION 92 C(2). AS REGARDS THE CLAIM OF THE ASSESSEE FOR BENEFIT OF +- 5% ADJU STMENT, IT IS OBSERVED THAT A SIMILAR CLAIM MADE BY THE ASSESSEE IN A.Y. 2006-07 HAS BEEN REJECTED BY THE TRIBUNAL VIDE ORDER DTD. 31-1-2013 (SUPRA) HOLDING THAT SINCE ONLY ONE COMPARABLE WAS FINALLY CONSIDERED FOR THE PURPOSE O F DETERMINING THE ALP, THE BENEFIT OF +- 5% ADJUSTMENT IN TERMS OF THE PROVISO TO SECTION 92 C(2) WAS NOT AVAILABLE. A SIMILAR VIEW HAS BEEN TAKEN BY THE DE LHI BENCH OF THE ITAT IN ITA 7638/MUM/2011 12 THE CASE OF HAWORTH (INDIA) (P.) LTD. VS. DCIT (SUP RA) CITED BY THE LD. D.R. WHEREIN IT WAS HELD THAT THE PROVISO TO SECTION 92 C(2) OF THE ACT IS APPLICABLE IN A CASE WHERE MORE THAN ONE PRICE IS DETERMINED B Y MOST APPROPRIATE METHOD AND IN THE CASE WHERE ONLY ONE PRICE IS DETE RMINED BY MOST APPROPRIATE METHOD, BENEFIT OF 5% IS NOT AVAILABLE TO THE ASSESSEE. THE SAID DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF HAWORTH (INDIA) (P.) LTD. (SUPRA) WAS SUBSEQUENTLY FOLLOWED BY THE MUMBAI BEN CH 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 PAR TIES AND IT WAS POSSIBLE TO COMPUTE THE ALP ON THE BASIS OF EVEN ONE COMPARA BLE, THE ASSESSEE WOULD NOT BE ENTITLED TO THE BENEFIT OF 5% RANGE AS PER T HE PROVISO TO SECTION 92C(2) OF THE ACT. 15. THE CONTENTION RAISED BY THE LD. COUNSEL FOR TH E 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 ASSESSEES 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 INS ERTED BY THE FINANCE ACT 2012 WITH RETROSPECTIVE EFFECT FROM 1-10-2009 AND O N SUCH CONSIDERATION, IT WAS HELD THAT THE LANGUAGE OF AMENDED PROVISO TO SE CTION 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 THI S DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A .Y. 2006-07, WE HOLD THAT THERE BEING ONLY ONE COMPARABLE THAT IS CONSIDERED IN THE CASE OF THE ASSESSEE ITA 7638/MUM/2011 13 FOR THE YEAR UNDER CONSIDERATION, THE BENEFIT OF +- 5%ADJUSTMENT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT WOULD NOT BE A VAILABLE TO THE ASSESSEE. 16. AS REGARDS THE CLAIM OF THE ASSESSEE FOR RISK A DJUSTMENT, IT IS OBSERVED THAT A SIMILAR CLAIM OF THE ASSESSEE WAS NOT ACCEPT ED BY THE TRIBUNAL IN A.Y. 2006-07 ON THE GROUND THAT NO QUANTIFICATION OF SUC H ADJUSTMENT WAS MADE BY THE ASSESSEE BY COMPARING ACTUAL QUANTITATIVE DI FFERENCE OF THE ASSESSEE WITH THAT OF THE COMPARABLES. IT WAS HELD THAT SUC H ADJUSTMENT, IN ANY CASE, COULD BE MADE ONLY WHEN SOME REAL AND ACCURATE EFFE CT OF THE DIFFERENCE IN ASSETS EMPLOYED AND RISK ASSUMED ARE BROUGHT ON REC ORD. AS SUBMITTED BY THE LD. D.R., IDC (INDIA) LIMITED WAS TAKEN AS A CO MPARABLE CASE IN THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE HIMSELF AND NO RISK ADJUSTMENT WAS CLAIMED IN RESPECT OF THE SAID COMPARABLE IN THE TP STUDY. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS SUBMITTED THAT MULTI-YEARS DATA WAS CONSIDERED BY THE ASSESSEE IN THE TP STUDY AND THE AVERAGE OF 3 YEARS MARGIN WAS TAKEN IN THE CASE OF IDC (INDIA) LIMITED TO ELI MINATE THE DIFFERENCE IN RISK ASSUMED. WE FAIL TO UNDERSTAND HOW THE USE OF MULT I-YEARS DATA AND TAKING THE AVERAGE MARGIN OF 3 YEARS CAN ELIMINATE THE DIF FERENCE ON ACCOUNT OF RISK ASSUMED. IN OUR OPINION, THIS METHOD OR BASIS, IF AT ALL WE CAN CALL IT SO, IS NOT A RECOGNIZED OR SCIENTIFIC METHOD OF RISK ADJUS TMENT AND BY ADOPTING THE AVERAGE OF 3 YEARS MARGIN, IT CANNOT BE ASSUMED THA T THE ASSESSEE HAS CLAIMED ANY RISK ADJUSTMENT. 17. THE LD. COUNSEL FOR THE ASSESSEE HAS LAID GREAT EMPHASIS ON THE FACT THAT THE ASSESSEE, WHO IS DEALING WITH ONLY ONE PAR TY WHICH IS ITS AE, HAS NOT TAKEN ANY MARKET RISK WHEREAS THE IDC (INDIA) LIMIT ED, WHO IS DEALING WITH THE THIRD PARTIES, HAS ASSUMED THE MARKET RISKS. IT IS OBSERVED THAT A SIMILAR STAND WAS TAKEN ON BEHALF OF AN ASSESSEE IN THE CAS E OF INTERRA INFORMATION TECHNOLOGIES (INDIA) PVT. LTD. (SUPRA) WHILE CLAIMI NG 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 ITA 7638/MUM/2011 14 SOURCE FOR WORK IS A RISK FACTOR TO BE CONSIDERED. IN THE CASE OF MARUBENI INDIA PRIVATE LTD. (SUPRA) CITED BY THE LD. D.R., I T WAS REITERATED BY THE TRIBUNAL THAT THE RISK ADJUSTMENT COULD NOT BE ALLO WED WHEN THE ASSESSEE FAILED TO BRING ANY EVIDENCE ON RECORD TO SHOW THE DIFFERENCE IN THE RISK PROFILE OF THE COMPARABLE COMPANIES VIS--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 ALLO W ANY RISK ADJUSTMENT. 18. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE US THAT ELABORATE SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEF ORE 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 WHIC H IS EVIDENT FROM PARA 6.6 OF HIS 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 ADJUSTME NT HAS BEEN COMPUTED BY WAY DIFFERENCE IN THE PLR AND THE BANK RATE. AS ALREADY MENTIONED ASSESSEE IS EXPRESSED TO THE SAME RISKS AS THE COMP ARABLES, 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 FURTH ER 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 B E EXPOSED TO DEPEND UPON A NUMBER OF FACTORS SUCH AS ITS SIZE, C OMPLEXITY BUSINESS ACTIVITIES, VOLUME ETC. IT IS BELIEVED THAT GENERALLY THE BANKS FACE CREDIT , LIQUIDITY AND REPUTATION RISKS. IN A BANKS PORTFOLIO, LOSSES STE M FROM OUTRIGHT DEFAULT DUE TO INABILITY OR UNWILLINGNESS OF A CUSTOMER OR COUNTER PARTY TO MEET COMMITMENTS IN RELATION TO LENDING, TRADING, SETTLE MENT AND OTHER FINANCIAL TRANSACTIONS. CREDIT RISK EMANATES FROM A BANKS DEALING WITH INDIVIDUALS, CORPORATE, FINANCIAL INSTITUTIONS OR A SOVEREIGN. FOR MOST BANKS, LOANS ARE THE LARGEST AND MOST OBVIOUS SOURC E OF CREDIT RISK; HOWEVER, CREDIT RISK COULD STEM FROM ACTIVITIES BOT H ON AND OFF BALANCE SHEET. IN ADDITION TO DIRECT ACCOUNTING LOSS, CREDI T RISK SHOULD BE VIEWED IN THE CONTEXT OF ECONOMIC EXPOSURES. ITA 7638/MUM/2011 15 THE FUNCTIONS PERFORMED BY BUSINESS ENTREPRENEUR AR E NOT PRESENT AT ALL IN THE CASE OF A BANK. THE TAXPAYER IN THE INST ANT CASE HAS SET UP A BUSINESS IN INDIA AND THEREFORE IT HAS TO BE COMPAR ED WITH INDEPENDENT BUSINESS ENTREPRENEURS AND NOT WITH BANKS. THE PLR RATE REFLECTS THE ELEMENT OF RISK FOR LOSS OF CAPITAL AND ALSO THE EL EMENT OF PROFIT OF THE BANK TO MEET THE COST OF ESTABLISHMENT, COST OF FU NDS AND TO GIVE A RETURN ON THE CAPITAL. THE DIFFERENCE BETWEEN BANK RATE AND PLR THEREFORE CANNOT REFLECT ONLY THE RETURN ON RISK. I N ANY CASE AN ENTREPRENEUR OTHER THAN A BANKING COMPANY HAS TO FA CE MANY MORE RISKS BESIDE THE CREDIT RISK . 6.6.2 THE ASSESSEE HAS ALSO SOUGHT ADJUSTMENT OF R ISK IN RESPECT OF RISK ADJUSTMENT UNDER THE CAPM MODEL: IT IS OFTEN ARGUED BY PEOPLE WHO VALUE ENTERPRISE O N 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 E FFICIENT MANAGEMENT OF THE OTHER. IN FACT THIS IS MYOPIC DIS POSITION OF A BUSINESS FUNCTION. AN ENTERPRISE HOWEVER COMPRISES OF A COLLECTION OF ACTIVITIES THAT ENTAIL RISKS. TO CONDUCT THESE ACTI VITIES AND RESPOND TO THEIR RISKS, THE FIRM NEEDS NOT JUST THE CAPITAL AL ONE, BUT IT HAS TO STRATEGIZE IN VARIETY OF WAYS TO RESPOND TO THE FAC TORS WHICH INFLUENCE ITS SUSTENANCE, GROWTH AND PROFITABILITY, BUT IT HA S NO CONTROL OVER THESE FACTORS. IN OTHER WORDS, IT MAY NEED CAPITAL PRIMAR ILY TO FUND ITS OPERATIONS. TO CUSHION IT AGAINST ADVERSE FINANCIAL RESULTS, AND TO ASSURE OBSERVERS OF ITS FINANCIAL SOUNDNESS; BUT TH IS OVER EMPHASIS OF CAPITAL AND ITS AVAILABILITY IS PRIMARILY FROM THE INVESTORS 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 THAT IS NOT THE BE ALL AND END ALL OF RISK MEASUREMENT AND RISK MAN AGEMENT. IT IS FOR THIS REASON THAT THE CAPITAL ASSET PRICING MODEL (C APM) MODEL FALLS SHORT SQUARELY TO MEASURE AND MANAGE THE RISK. CAPITAL ASSET PRICING MODEL IS GENERALLY USED IN IN VESTMENT ANALYSIS BY ECONOMISTS, INVESTMENT ADVISORS AS WELL AS INVESTME NT BANKERS. THE CAPM IS ALSO OFTEN USED TO MEASURE THE PERFORMANCE OF MUTUAL FUNDS AND OTHER MANAGED PORTFOLIOS. THE CAPM BUILDS ON TH E MODEL OF PORTFOLIO CHOICE DEVELOPED BY HARRY MARKOWITZS (19 59). IN MARKOWITZS 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 ITA 7638/MUM/2011 16 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 UN CERTAINTY OF FUTURE WEALTH 7. SEPARATION OF FINANCIAL AND PRODUCTION SECTORS. 8. THUS, PRODUCTION PLANS ARE FIXED. 9. RISK FREE RATES EXIST WITH LIMITLESS BORROWING C APACITY AND UNIVERSAL ACCESS. 10. THE RISK FREE BORROWING AND LENDING RATES ARE E QUAL. 11. NO INFLATION AND NO CHANGE IN THE LEVEL OF INTE REST RATE EXIST. 12. PERFECT INFORMATION, HENCE ALL INVESTORS HAVE T HE SAME EXPECTATIONS ABOUT SECURITY RETURNS FOR ANY GIVEN TIME PERIOD . THE TAX PAYER HAS NOT PROVIDED ANY EVIDENCE OR ARGU MENT HOW THE ABOVE CONDITIONS ARE SATISFIED IN ITS CASE. IN CAPM , THE ASSUMPTION IS THAT THE INVESTOR HAS A CHOICE OF WIDE RANGE OF INV ESTMENT OPPORTUNITIES VARYING FROM ZERO RISK GOVERNMENT SECURITIES TO HIG H RISK INVESTMENTS SUCH AS STOCKS, MUTUAL FUNDS ETC. SO, THIS THEORY S HOULD BE USED ONLY FOR INVESTORS WHO HAVE A WIDE CHOICE OF PORTFOLIOS TO INVEST. HOWEVER, IN THE CASE OF TAX PAYER, THE PARENT COMPANYS MAIN AI M IS TO REDUCE COST BY OUTSOURCING TO INDIA AND IT IS NOT THE CASE OF T HE PARENT COMPANY THAT IT HAS UNLIMITED CHOICE FOR STARTING VARIOUS B USINESSES OF DIFFERENT RISK. THE PARENT COMPANYS 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 APP LICABILITY WHILE TAKING DECISION BY THE PARENT COMPANY TO DO BUSINES S IN INDIA THROUGH ITS SUBSIDIARY . THE CAPM MODEL MAINLY WORKS ON THE RETURN ON CAPITA L EMPLOYED IN THE FORM OF EQUITY OR DEBT. IT DOES NOT RECOGNIZE T HE PRESENCE OF INTANGIBLES INCLUDING HUMAN CAPITAL. THE ABOVE MODE L MAY BE A GOOD TOOL IN THE INDUSTRIES IN WHICH HUMAN CAPITAL OR AN Y OTHER INTANGIBLE DOES NOT PLAY A MAJOR ROLE LIKE MANUFACTURING SECTO R. ONE MORE PROBLEM WITH THE ABOVE METHOD IS THAT IT USES OPERA TING ASSETS CONSTITUTING FIXED AND CURRENT ASSETS. AS MENTIONED EARLIER, IN THE SERVICES SECTORS LIKE FINANCIAL ADVISORY SERVICES, THE MAIN STRENGTH IS ITS HUMAN CAPITAL RATHER THAN PHYSICAL ASSETS. HENCE, A PPLICATION OF CAPM FOR ADJUSTING RISK IS NOT APPROPRIATE TO RESEARCH A ND SOFTWARE SECTOR AS THIS MODEL DOES NOT RECOGNIZE THE EXISTENCE OF HUMA N CAPITAL. 6.6.3. THE OTHER FACTORS RELATING TO THE RISK OF TH E CAPTIVES ARE REDUCTION OF RISK FOR MNCS:- THE CONTENTION OF THE TAX PAYER IS THAT THE BUSINES S RISK IS BORNE BY THE AE AND THE INDIAN SUBSIDIARY IS ONLY A CAPTIVE SERV ICE PROVIDER WITH ITA 7638/MUM/2011 17 MINIMUM RISK. HOWEVER, MANY STUDIES HAVE BEEN CONDU CTED ON MNCS SETTING OP THEIR SHOPS ACROSS THE GLOBE AND FOUND T HAT BY MULTINATIONALISING THEIR OPERATIONS, THESE MNCS ARE DECREASING THE RISK. MANY STUDIES HAVE BEEN CONDUCTED TO SEE HOW T HE DEGREE OF MULTINATIONALITY PRODUCES ADDITIONAL BENEFITS IN TE RMS 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 RE TURN PERFORMANCE OF THE MNCS (DEGREE OF MULTINATIONALITY AND FINANCIAL PERFORMANCE: A STUDY OF U.S.-BASED MULTINATIONAL CORPORATIONS BY K HURSHEED 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 T HE BENEFITS OF TAXPAYER BEING NOT EXPOSED TO MARKET RISK. THE CONCEPT OF DEALING WITH A SINGLE CUSTOMER AND T HE INHERENT RISKS INVOLVED HAVE BEEN DISCUSSED BY M/S INFOSYS TECHNOL OGIES LTD IN ITS AUDIT REPORT FOR THE YEAR 2004-05 AS UNDER (PAGE 95 ): CLIENT CONCENTRATION: WE RELY ON REPENT BUSINESS BASED ON THE STRENGTH OF OUR CLIENT RELATIONSHIPS AND A MAJOR PORTION OF OUR REVENUES C OME FROM EXISTING KEY CLIENTS. AS THE SIZE OF A CLIENT INCREASES, IT LIMITS OUR PRICING FLEXIBILITY, STRENGTHENS THE CLIENTS NEGOTIATION C APABILITY, AND REDUCES THE ABILITY TO GOVERN THE RELATIONSHIP FOR MUTUAL A DVANTAGE. ALSO, THE BUSINESS GROWTH OF THESE LARGE CLIENTS, THEIR OWN P ROFITABILITY AND CHANGES IN IT STRATEGY HAVE THE POTENTIAL TO ADVERS ELY IMPACT OUR REVENUES AND PROFITABILITY AND INCREASE CREDIT RISK . HOWEVER, LARGE CLIENTS AND HIGH REPEAT BUSINESS LEAD TO PREDICTABL E REVENUE GROWTH AND LOWER MARKETING COSTS. THEREFORE, TO STRIKE A B ALANCE, 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 CL IENTS BASE. DEPENDENCE UPON A PARTICULAR CLIENT OR A PARTICULAR GEOGRAPHY ALONE IS ALWAYS CONSIDERED A GREATER RISK. THUS, DOING BUSIN ESS EXCLUSIVELY WITH A SINGLE CLIENT OR A SINGLE GROUP OF CLIENTS CARRIE S 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 S AME LINES AS AN INDEPENDENT ENTREPRENEUR WOULD CLAIM PREMIUM FOR BE ARING MARKET RISK. ITA 7638/MUM/2011 18 THERE ARE FACTORS AT WORK THAT ACTUALLY PLACE A CAP TIVE SERVICE PROVIDER IN A MUCH HIGHER RISK ZONE. FOR EXAMPLE, A CAPTIVE SERVICE PROVIDER IS COMPLETELY DEPENDENT ON ITS ASSOCIATED ENTERPRISE A ND ANY DOWNSWING IMPACT IN THE BUSINESS OF THE ASSOCIATED ENTERPRISE COULD HAVE A SEVERELY DAMAGING IMPACT ON THE CAPTIVE SERVICE PRO VIDER. SUCH IS NOT THE CASE WITH AN ENTREPRENEUR WHO HAS MULTIPLE CLIE NTS ARID THIS DIVERSIFICATION ACTUALLY MITIGATES RISK SINCE A DOW NSWING IN THE BUSINESS OF ONE CLIENT RESULTS IN A LESSER IMPACT O N ITS BUSINESS AS COMPARED TO A CAPTIVE SERVICE PROVIDER. HENCE, THE TAX PAYERS ARGUMENT THAT IT IS COMPENSA TED ADEQUATELY FOR ITS SINGLE CUSTOMER RISK IS NOT CORRECT. IF THE AE COMPANY GOES INTO LIQUIDATION OR BANKRUPTCY DUE TO UNFAVORABLE ECONOM IC OR OTHER CONDITIONS, THE BUSINESS OF THE TAX PAYER COMES TO STAND STILL THUS, THERE IS NEITHER THE GUARANTEE OF ASSURED BUSINESS/ TURNOVER NOR OF THE TENURE. THE ONLY GUARANTEE IS OF THE RETURN ON THE COST. SO, THERE IS MORE RISK IN THE CASE OF TAX PAYER WHO IS DEPENDENT ON A SINGLE CUSTOMER WHEN COMPARED TO COMPARABLES WHO MAY NOT D EPEND ON SINGLE CUSTOMER. COST PLUS ARRANGEMENT VS PRICING RISK THE TAXPAYER HAS A COST PLUS ARRANGEMENT, WHICH MEA NS BENEFITS OF THE SAVINGS ON ACCOUNT OF INCREASED EFFICIENCY, COST CU TTINGS OR INCREASE IN TURN OVER ETC DOES NOT ACCRUE TO THE TAXPAYER. IT O FFSETS THE BENEFIT OF NOT TAKING THE PRICING RISK. AN INDEPENDENT ENTERPRISE GETS PROFIT IN ADDITION T O THE COSTS. THE MAIN ISSUE IS THAT THE TAX PAYER HAS NOT BEEN ADEQUATELY REMUNERATED ON PAR WITH THE COMPARABLES, WHICH IS THE ESSENCE OF THE T RANSFER PRICING I.E. IF THE TAX PAYER AND ITS AE IS PERFORM THE FUNCTIONS I N UNCONTROLLED CONDITIONS, WHAT WOULD HAVE BEEN THE MARGIN EARNED BY THE TAX PAYER. AS DISCUSSED IN DETAIL AS ABOVE THE RISK UNDERTAKEN BY INDEPENDENT ENTERPRISES IS EQUIVALENT TO THE SINGLE CUSTOMER RI SK UNDER TAKEN BY THE TAX PAYER. HENCE, THERE IS NOT MUCH DIFFERENCE IN R ISKS ASSUMED BY THE TAX PAYER AND ALSO BY THE COMPARABLES. SO, THE ARGU MENT OF THE TAX PAYER THAT THE TAX PAYER EARNS LESS WHEN COMPARED T O ITS AE IS WITHOUT ANY BASIS. IT IS NO DOUBT TRUE THAT THE DRP HAS NOT PASSED A W ELL DISCUSSED ORDER ON THIS ISSUE. HOWEVER, THE DRP HAS CLEARLY STATED OF HAVI NG AGREED WITH THE VIEW OF THE TPO ON THIS ISSUE THEREBY ADOPTING THE SAME REA SONS AS GIVEN BY THE TPO TO REJECT THE CLAIM OF THE ASSESSEE FOR RISK ADJUST MENT. ITA 7638/MUM/2011 19 19. AS REGARDS THE QUANTIFICATION OF RISK ADJUSTMEN T, THE LD. COUNSEL FOR THE ASSESSEE HAS INVITED OUR ATTENTION TO THE WORKING O F RISK ADJUSTMENT FURNISHED BY THE ASSESSEE ON PAGE NO. 213 OF THE AS SESSEES 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) 1 1.55% COST PLUS MARKUP GAPL 12.60% RESULT ARMS LENGTH AS IS CLEARLY EVIDENT FROM THE ABOVE WORKING, THE D IFFERENCE 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 ASS ESSEE, IN OUR OPINION, ARE HARDLY SUFFICIENT TO COMPLY WITH THIS REQUIREMENT. IT IS ALSO OBSERVED THAT IN THE CASE OF WILLS PROCESSING SERVICES (INDIA) PVT. LTD. (SUPRA) CITED BY THE LD. D.R., SIMILAR METHOD WAS SOUGHT TO BE USED BY THE A SSESSEE FOR RISK ADJUSTMENT AND THE SAME WAS REJECTED BY THE TRIBUNA L HOLDING THAT THERE IS NO CO-RELATION BETWEEN THE BANK LENDING RATES AND R ISKS 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. MA RKET RISK, CUSTOMER RISK, GOVERNMENT POLICY RISK ETC. ASSOCIATED WITH CONDUCT ING BUSINESS. IT WAS ALSO ITA 7638/MUM/2011 20 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. 20. KEEPING IN VIEW THE VARIOUS DECISIONS OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL AS DISCUSSED ABOVE AND HAVING REGARD TO AL L THE RELEVANT FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE ASSESSEE HAS FAIL ED TO QUANTIFY THE RISK ADJUSTMENT BY BRINGING CERTAIN REAL AND ACCURATE FA CTS RELATING TO THE DIFFERENCE IN RISK ASSUMED BY THE ASSESSEE VIS--VI S THE COMPARABLE AND IN THE ABSENCE OF THE SAME, ITS CLAIM FOR RISK ADJUSTM ENT CANNOT BE ALLOWED AS RIGHTLY HELD BY THE AUTHORITIES BELOW. WE THEREFOR E FIND NO MERIT IN ASSESSEES CLAIM FOR THE BENEFIT OF +- 5% ADJUSTMENT AS WELL A S FOR RISK ADJUSTMENT AND REJECT THE SAME. THE A.O. IS ACCORDINGLY DIRECTED TO RECOMPUTE THE TP ADJUSTMENT BY ADOPTING THE COST PLUS RATIO OF 15.80 % AS AGAINST 12.6% SHOWN BY THE ASSESSEE. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. 0.1 2340 & 5/ ) 6 & 7 ORDER PRONOUNCED IN THE OPEN COURT ON 17-05-2013. . / & ,-. ( 8 9 : 1 17-05-2013 & * SD/- SD/- (D. MANMOHAN) (P.M. JAGTAP ) VICE PRESIDENT / ACCOUNTANT MEMBER ( ;* MUMBAI ; : DATED 17-05-2013. ).2../ RK , SR. PS ITA 7638/MUM/2011 21 ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. '# / THE APPELLANT 2. $%'# / THE RESPONDENT. 3. ( < () / THE CIT(A)13, MUMBAI. 4. ( < / CIT -7, MUMBAI 5. ?)@ $22A3 , + A3. , ( ;* / DR, ITAT, MUMBAI D BENCH 6. 4 B* / GUARD FILE. ! ( / BY ORDER, %? $2 //TRUE COPY// )/(* + ( DY./ASSTT. REGISTRAR) , ( ;* / ITAT, MUMBAI