Income Tax Appellate Tribunal - Mumbai
Nethawk Networks India P.Ltd, Mumbai vs Assessee on 11 October, 2013
आमकय अऩीरीम अधधकयण ―K‖ न्मामऩीठ भुंफई भें ।
IN THE INCOME TAX APPELLATE TRIBUNAL ―K‖ BENCH, MUMBAI
श्री फी. आय. मभत्तर, न्मायमक सदस्म एवुं श्री डी. करूणाकय याव, रेखा सदस्म के सभक्ष ।
BEFORE SHRI B.R. MITTAL, JM AND SHRI D. KARUNAKARA RAO, AM
आमकय अऩीर सुं./I.T.A. No.7633/M/2012(AY: 2008-2009 )
NetHawk Ne twork s India Private फनाभ/ The Income Tax Officer,
Limited, Vs. Ward No. 3(2)(1),
5 t h Floor, IDCO Tower, Mancheswar R.No.673, 6 t h Floor,
Industrial Est ate, Bhubaneshwar, Aayakar Bhavan, M.K. Road,
Orissa - 751010. Mumbai - 400 020.
स्थामी रेखा सुं ./ PAN : AACCN 0994 P
(अऩीराथी /Appellant) .. (प्रत्मथी / Respondent)
अऩीराथी की ओय से / Appellant by : Shri M.P. Lohia,
Mr Mahesh Mandlecha and
Mr Nikhil Tiwari
प्रत्मथी की ओय से/ Revenue by : Shri Ajeet Kumar Jain CIT-DR
सनवाई की तायीख /Date of Hearing : 11.10.2013
घोषणा की तायीख /Dat e of Pronouncement : 06.11.2013
आदे श / O R D E R
PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 26.12.2012 against the orders of the DRP / TPO/AO for the Assessment Year 2008-2009.
2. During the times of hearing before the Tribunal, at the outset, Shri M.P. Lohia Ld Counsel for the assessee mentioned that the issues raised in ground nos. 1, 2, 3, 5, 8 and 12 are not pressed. Accordingly, the same are dismissed as not pressed. Otherwise, ground no.1 is raised question the decision of rejection of the comparables documented in the Transfer Pricing (TP) study of the assessee. Referring to ground no. 6 and 7, Ld Counsel mentioned that these two grounds are related and they have to be adjudicated together. Further, referring to ground no.9, Ld Counsel mentioned that the issue relating to the non-consideration of additional companies offered by the assessee as comparables was not adjudicated by the DRP. Therefore, the same is required to be remanded to the files of the DRP / TPO / AO for fresh adjudication with a direction to pass a speaking 2 order. Considering the said prayer of the Ld Counsel and considering the no objection from the Ld DR, we remand the said ground 9 to the DRP/TPO/AO with a direction to adjudicate the same by passing a speaking order after giving requisite analysis / reasons for non-consideration or rejection, if any. Accordingly, ground no.9 is allowed for statistical purposes. Referring to ground no.13, Ld Counsel mentioned that the issues raised in this ground relate to levy of interest u/s 234B and 234D of the Act, which required to be allowed as consequential. Ld Counsel also mentioned that the issues raised relating to the initiation of penalty proceedings u/s 271(1)(c) of the Act, the issue becomes in fructuous in view of its very nature. Accordingly, the issue relating to levy of interest are allowed as consequential and the issue relating to penalty proceedings is dismissed as infructuous.
3. Eventually, the grounds left for detailed adjudication by us in this order are ground no.4, 6, 7, 10 & 11 and the said grounds read as under:
―4. Adding certain companies arbitrarily to the comparable set of AY 2008-2009 contending that these were comparable for AY 2007- 2008.
Erred in considering certain companies as comparable to the appellant for AY 2008-2009 contending that these companies were considered as comparables by the tax authorities for AY 2007-2008 without appreciating the fact that the case of the appellant was not subject to transfer pricing assessment for AY 2007-2008.
6. Use of appropriate filters for screening of companies.
Erred in applying certain inappropriate rejection criteria for screening of companies.
7. Accepting certain companies which are functionally not comparable to the appellant based on certain filters.
Erred in accepting certain company-es which are functionally not comparable to the appellant based on certain filters.
10. Incorrect computation of the appellant‟s operating margin Erred in computing the appellant's operating margin.
11. Rejection of the appellant‟s plea for the need for working capital and risk adjustments.
Erred in not allowing the working capital adjustment (to account for the differences in receivables and payables of the appellant vis-à-vis comparable companies) and risk adjustment (to account for the differences in risk profile of the appellant vis-à-vis comparable companies) requested by the appellant.‖
4. Briefly stated relevant facts of the case are that the assessee is engaged in the business of software development services required for telecommunication 3 related parts manufactured by its parent company i.e., M/s. Nethawk Oyj, Finland. Assessee is a 100% captive unit for its parent as a solitary customer. During the year, assessee registered certain international transactions amounting to Rs. 15,12,69,457/- on account of „provision of programming services‟. As per the legal requirement u/s 92CA(1) of the Act, AO made a reference to the TPO vide his letter dated 21.12.2010 for determining Arm's Length Price. TPO considered the assessee's Transfer Pricing study report and its comparables and rejected the same eventually. Otherwise, assessee applied Transactional Net Margin Method (TNMM) as most appropriate method with Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator (PLI). Accordingly, assessee benchmarked the transactions at OP of 11.90% over the total cost. PLI at 11.90% is higher than the margins reported by the comparable companies considered in the TP study of the assessee. Thus, the impugned international transactions are at Arm's Length as per the assessee. This decision of the TPO is now final, since the assessee's representative has not pressed the ground no.1 and others before the Tribunal. Then, the TPO invoked the provisions of section 92C(3) of the Act and proceeded to determine the ALP. Accordingly, TPO conducted his search for suitable comparables on the data available in Prowess and Capitaline Databases and applied the following filters.
―Companies whose data is not available for AY 2007-2008 were excluded. Companies whose software development service's revenue is <Rs. 1cr were excluded. Companies whose Software development service revenue is less than 75% of the total operating revenues were excluded.
Companies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded.
Companies who have less than 25% of the operating revenues as export sales were excluded. Companies who have income from Non Financial Services were excluded. Companies having different financial year ending (ie not March, 31, 2008)) or date of the company does not fall within 12 months period i.e. 1.4.2007 to 31.3.2008, were rejected. Companies whose employee cost to operating revenues is less than 25% of the revenues were excluded.
Companies whose onsite revenue is more than 60% of the export revenues were excluded. Companies that are functionally different from that of taxpayer, after giving valid reasons, were excluded.‖
5. To start the TP study, TPO considered 893 companies based on the criteria of contemporaneous data, lower turnover filter and other mentioned above and then shortlisted 59 companies out of 839. Further, out of the said 59, the TPO further shortlisted 14 companies and invoked the provisions of section 133(6) of the Act on the said 14 companies. These 14 companies are part of the total 23 companies, finally considered by the TPO for ALP purpose. In addition, the 4 TPO also conducted a segmental search using the Prowess Database and shortlisted 156 companies. Out of them, the TPO shortlisted 2 companies namely (1) Accel Transmatics Ltd; (2) Acropetal Technologies Ltd and invoked the provisions of section 133(6) in respect of these two companies too. Further, the TPO continued the search process in Capitaline Neo Database for want of more comparables and examined 269 companies. Applying the filters mentioned above, the TPO short listed 15 companies. Considering the defects in the database, TPO rejected two companies in the lot namely (1) Ezest Solutions Ltd and (2)Thirdware Solutions Ltd and invoked the provisions of section 133(6) on these two companies too. Further, TPO picked up 5 additional comparables namely (1) Avani Cimeon Technologies Ltd (2) Celestial Labs Ltd (3) LGS Global Ltd (Lanco Global Solutions Ltd) (4) Tata Elxi Ltd (segmental) and (5) Wipro Ltd (segmental). These companies were short listed by the TPO based on his search for the earlier AY 2007-2008, in connection with other cases as clarified by the CIT-DR before us. Finally, the list of comparables proposed to the assessee and the related OP / TC as PLI are listed in the total as under:
56. From the above it is evident that the TPO shortlisted 23 comparables and arrived at the Arithmetic Mean Margin @ 24.99% against the assessee's margin of 11.90%. TPO issued a show cause notice and in reply, the assessee filed objections vide its letter dated 14.10.2011. In the said reply, the assessee justified the TP study report prepared by him which is a non issue now and further, assessee provided written explanation to the defects in the report picked up by the TPO. TPO rejected the objections raised by the assessee and proceeded to determine Arm's Length Mean Margin (ALM) as per the table given below.
Operating cost Rs. 14,00,22,902/-
Arm's Length Mean Margin 24.99% of the Operating cost
Price charged Rs. 17,50,14,625/-
Shortfall being adjustment u/s 92CA Rs.2,26,55,705/-
105% of International transaction Rs. 15,99,76,866/-
95% of international transaction Rs. 14,47,40,974/-
Whether the shortfall falling within +/- 5% range No
―Considering the above the Arm's Length Price of provision of software development service is determined as Rs. 17,50,14,625/-. However, the assessee has charged only 15,23,58,920/-which is Rs. 2,26,55,705/- lesser than the ALP of international transaction determined. Since, the shortfall is not falling within +/- 5% range, an adjustment of Rs. 2,26,55,705/- is made.‖
7. Thus, TPO's adjustments worked out to Rs. 2,26,55,705/-. Subsequently, AO computed the total income of the assessee at Rs. 2,83,85,118/- after incorporating the adjustments of the TPO. The draft order was made available to the assessee and the assessee filed objections before the DRP in accordance with the procedure laid down in this regard. Assessee raised various grounds which are more or less 6 are the same to that of the grounds raised before us. The DRP has granted various directions to the AO and the relevant directions will be discussed in the appropriate areas while dealing with the issues and grounds in the succeeding paragraphs.
Eventually, Ld DRP rejected the Celestial Biolabs Limited as a comparable in view of the very high profit margin @ 87.94%. Consequently, the Arithmetic Mean dropped to 20.39% as against 24.99% originally quantified by the TPO. Thus, the adjustment over the operating income is now determined at Rs. 1,56,20,380/- and the total income of the assessee for the year was computed at Rs 2,05,66,846/-. Aggrieved with the above conclusions of the DRP / TPO / AO, the assessee filed the present appeal before the Tribunal with the above mentioned grounds. To clarify, there is no dispute on the appropriate method, PLI chosen, TPO's rejection of the TP study of the assessee before us. The ground-wise adjudication is given in the following paragraphs.
8. Ground no.4 relates to TPO's decision for roping in five additional companies arbitrarily to the list of comparable. In this regard, as mentioned in the grounds, Ld AR for the assessee contends that these five additional companies were the comparable for the AY 2007-2008 and the data considered do not pertain to the current year ie AY 2008-09. In that case, the TPO violated the filter enlisted for TP study. Relevant comments of the TPO from his on this issue read as under:
―Additional Comparables: Further, it is also examined whether comparable companies considered for the preceding assessment year i.e., 2007-2008 by the Department are comparables in the current year. These are examined as under.....‖
9. Before us, it is the argument of Sri Lohia, Ld Counsel for assessee that the TPO is under wrong impression that the assessee's return of income was processed for arriving at the ALP for the AY 2007-08 by the Department, where the said additional comparables pertaining to AY 07-08 were considered for the purpose of arriving at the ALP. In this regard, Ld counsel mentioned that the AY 2008-2009 is the relevant AY and happened to be the first assessment year of the assessee. Therefore the question of considering any companies as comparables for the AY 2007-2008 is patently wrong and therefore, the TPO's TP study suffers from fatal 7 defects and therefore, self destructive. Therefore, it is the contention of the Ld Counsel that the said 5 additional comparable companies namely (1) Avani Cimeon Technologies Ltd (2) Celestial Labs Ltd (3) LGS Global Ltd (Lanco Global Solutions Ltd) (4) Tata Elxi Ltd (segment) and (5) Wipro Ltd (segment) should be excluded from the gross list of 23 final comparable companies short listed by the TPO for ALP purpose.
10. On the other hand, Sri Jain Ld CIT- DR accepted to the fact that AY 2008-09 is undisputedly the first year of the assessment and the present TP study was done for the first time. However, he is critical of the aforementioned argument of the Sri Lohia and proceeded to clarify that the said 5 additional companies were part of the 26 other comparable companies studied by the TPO. Elaborating the same, Si Jain submitted that the TPO studied these comparables in connection with TP studies of other company studied by him and of course for the AY 2007-2008. Otherwise, as per the CIT-DR, the data considered in this case relates to the AY 2008-09 only and therefore, he submitted arguments of Ld Counsel should be dismissed.
11. We have heard both the parties on this issue and perused the orders of the Revenue and the relevant provisions of the Act in this regard. In principle, it is well settled legal proposition that the TPO is very much within the statutory limitations in picking up the data for the last three years including that of the current year (AY 2008-09) for TP study. Therefore, AY 2007-2008 falls within that limitation. Therefore, no fault can be found on this. Further, it is the argument of the Ld DR at the Bar that the data considered for doing the benchmarking studies using these 5 comparables relates to the AY 2008-2009 only and the reference to the AY 2007- 2008 should not be mistaken for the data considered for TP studies. We find Ld Counsel has not brought any evidence to suggest that data of these companies used for the TP study relates to the AY 2007-2008 and not of the AY 2008-2009. As such, during the proceedings before us, no evidence was not brought to our notice to demonstrate that the FAR analysis, PLIs etc of these additional 5 comparables considered by the TPO in that case relate to that of the AY 2007-08. Considering the fact that the first year of TP study for the present assessee, we find that the 8 explanation of the CIT-DR has merit and therefore, objections raised by the Ld Counsel are rejected on both the counts. Accordingly, the ground 4 is dismissed.
12. Ground no.6 revolves around the issue of accepting certain companies which are functionally not comparable and use of inappropriate filters for screening purpose. In this regard, the short listed inappropriate filters refers to turnover filter, employee cost and onsite revenue. In this regard, Ld Counsel brought our attention to the list of filters and narrated that the filter relating to exclusion of comparables with turnover of Rs. 1 Cr or below is one such filter and as per Ld Counsel, the same should have also to exclude the cases of huge turnover on maximum side too. Referring to the data of the cases of Infosys Technologies Ltd and Wipro Ltd, Ld Counsel mentioned that these companies have turnovers of Rs. 15,653 Crs and Rs. 11,276 Crs respectively as against the assessee's turnover of Rs. 15 Crs, approximately. Prima facie, they are incomparable. By not filtering out these cases of extremely high turnovers, the TPO made an error in selection process of comparables. In this regard, Ld Counsel relied on the decision of Delhi High Court in the case of Agnity India Technologies P Ltd, supra and other orders of the Tribunal. The assessee also filed copies of other decisions of the Tribunal to suggest that Infosys Technologies Ltd and Wipro Ltd are not good comparable cases in view of the huge turnover with the diversified area of operations. Sri Lohia fairly submitted that the issue of turnover was referred to Special Bench but only to be withdrawn considering the judgment of the Hon'ble High court in the case of Agnity India Technologies P Ltd, supra. However, he agreed that the ‗turnover' is one of the factors that contribute to the giantness of the company and other factors can be many ie geographic locations, branches, employee numbers, diverse functions etc. Further, referring to the other two filters ie onsite revenue and employee cost qua the Acropetal Technologies Ltd., he mentioned that the the said case should not figure in the final list of comparables.
13. Per contra, on the issue of expanding the turnover filter to the cases of higher turnover also, Ld DR mentioned that the cases of Infosys Technologies Ltd and Wipro Ltd are functionally comparable as they succeeded the FAR analysis test.
9AO/TPO considered the segmental data pertaining to the segment of ‗software development services' and in this regard, he relied on the segmental data available in the public domain. Referring to the judgment of the Delhi High Court in the case of Agnity India Technologies P Ltd, (supra) cited by Ld AR, he mentioned that giantness of the company was the subject matter in that case and not on the turnover filter. According to Sri Jain, The terms giantness and the turnover are two different functions of a company. Further, to rebut/counter the impact of the said judgment in the case of Agnity, supra, Ld DR filed a copy of the decision of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd vs. DCIT vide ITA No. 4547/M/2012 and ITA No. 4429/M/2012 (AY 2007-2008), order dated 1.3.2013, which is subsequent in time and directly on the issue of ‗turnover', and mentioned that these two cases (Infosys and the Wipro) cannot be excluded merely basing on the ground that they recorded huge turnover, when the assessee failed to demonstrate that the turnovers have any effect or influence on their operating margins. It is the general rule to include such cases when the comparables are otherwise functionally similar and segmental data suggest in favour of such comparison. Regarding the rejection of facts based on the on-site filter, Ld DR justified the said filter and mentioned that so long as the filters are uniformly applied, no mistake can be found on the basis of bias and undue influence. More so, when the AR failed to demonstrate with evidences about the incongruity if any.
14. We have heard both the parties on this issue of picking up the Infosys and Wipro as the good comparables on one side and also on the appropriateness of the filters (ie (i) fixing turnover filter on maximum side; (ii) employee cost and (ii) onsite revenue filter) chosen by the TPO. On the filter relating to providing maximum turnover limit when the minimum turnover limit is proscribed, the comparables Infosys Technologies Ltd and Wipro Ltd are the target companies and we find the issue is not adjudicated by revenue authorities meaningfully. It is the objections of the assessee that the TPO should have provided maximum limits too and he should not have pickup up the comparable such as Infosys and Wipro Ltd which are giants with huge turnovers. Regarding these two companies with high turnovers, we find this issue is linked to the one specially being adjudicated while dealing with the 10 ground 7 below relating to accepting of certain companies as good comparables. It is the submission of the assessee's counsel that the if these two companies with high turnover and margins are excluded, the assessee PLI is at arm's length and consequently, the TP adjustments are uncalled for. Since, the AR has raised these objections, the onus on the assessee to demonstrate before the revenue authorities in the remand proceeding. Accordingly, we direct the AO/TPO/DRP to all the submissions/objections raised by the assessee by passing a speaking order and of course after granting reasonable opportunity to the assessee.
15. Regarding the correctness of the other filters, namely (i) employee cost and
(ii) onsite revenue filter, we find the objections of the assessee are raised in connection with the Acropetal Technologies Ltd. These issues are discussed in details and dismissed the objections of the assessee and upholding the correctness of the TPO's decision in holding this company as a good comparable. Relevant discussion is given in para 17 - A of this order. Therefore, we find no merit in the objections of the assessee on this filter. Accordingly this part of the ground is partly allowed for statistical purpose.
16. Ground no.7 relates to the accepting of certain companies as good comparables, when they are not functionally comparable through FAR analysis and also based on certain filters. The brief facts on how these comparables are not good ones are discussed in the order of the DRP vide para 13.2 and the same reads as under:
―13.2. The assessee has objected to adoption of certain comparables adopted by the T.P.O. on the basis of failure to meet filters/functional analysis etc. The assessee has argued that Acropetal Technologies Limited (Seg.) has failed to meet employee cost filter and onsite revenues filter. Similarly, in respect of Avani Cimcon Technologies Limited, the assessee has objected that the information is not available in public domain and the T.P.O. has done cherry-picking and the case of Bodhtree Consulting Limited being functionally different with hybrid service business model and an exceptional year of operations. The comparable of Celestial Biolabs Limited has been disputed in failing to meet the employee filter, having Supernormal profits during the year and being functionally different from the assessee. E-Infochips Limited has been claimed to be functionally different from the assessee. E-Zest Solutions Limited has been argued to be functionally different being engaged in engaged in software services as well as products. Likewise, the inclusion of Infosys Technologies Limited has been disputed by the assessee on account of having 11 comparatively higher turnover, supernormal profits and being functionally different KALS. Information Systems Limited has been claimed to be functionally different being into business of provision of software development services as well as sale of software products. Likewise, Tata Elexi Limited has been distinguished on account of being functionally different being operating in software development & services of different category. The comparables case of Wipro Limited has been disputed on account of high turnover and functional difference.‖
17. From the above, it is evident that the assessee is critical of the fact that the some of the companies are functionally different in view of the fact that they are engaged in the products also. Further, it is the case of Acropetal Technologies Limited (Seg.), which has not met the filter relating to the employee cost as well as on-site revenue filters. Further, it is the assessee objected to the fact that certain companies information is not available on the public domain. In this regard, the direction of the DRP is that the TPO has undertaken FAR analysis by examining the Annual Reports and other documents before rejecting the incomparable cases. The assessee is aggrieved with such direction and raised the present appeal vide ground no.7.
18. Before us, Ld Counsel pickup of each of the said comparables and proceeded to submit how they are not good comparables. Comparable wise submissions are discussed in the following paragraphs.
A. Acropetal Technologies Limited (Seg.): Referring this case, Ld Counsel submitted that this case should be filtered considering the filter of ‗employee cost' selected by the TPO. As per the counsel employee cost works out to 8.32% only against the TPO's filter of ―companies whose employee cost to operating revenues is less than 25% of the revenues were excluded‖. He also mentioned that the onsite revenue details are not available therefore, the other filter relating to onsite revenue is also not determinable meaning fully. In such circumstances, this company should no longer be a good comparable.
19. Per contra, Ld DR stated that the employee cost is wrongly calculated 8.32% of the total receipts and without reducing the onsite receipts out of total of Rs. 59.45 Crs. Therefore, the percentage figure of 8.32 is erroneously worked out. If the gross figures of employee cost and the revenues are considered, in our opinion, the 12 employee cost is within the limits specified in the filter picked up by the TPO. Therefore, we find merit in the explanation of Ld DR. Otherwise, the Acropetal Technologies Limited (Seg.) is functionally comparable as the same is engaged in software development services. With 72.98% onsite development cost, the TNMM method in the TP studies needs only the broad functional comparability and not to the precise matching of the comparable companies. As such, Ld AR has not made out any case that the said company is functionally different and what is compared here is the segmental data of Acropetal Technologies Limited (Seg). Therefore, the objections of the assessee are dismissed and we uphold the decision of the DRP for these different reasons too.
B. Avani Cimcon Technologies
20. The objection of the assessee in this case is that the company is engaged in the development of software products like DXchange, CARMA etc. In this regard, the Ld Counsel filed the material downloaded from the net as well as the press information available in the public domain, which shows that the assessee is engaged in marketing of the products and the revenues earned out of product based sales. On the other hand, Ld DR filed copies of the financial statements and mentioned that the said company is engaged in the software services. On considering the material available before us, we are of the opinion that this case is functionally different as this company is a product based and not of the development services. Therefore, we agree with the arguments of Sri Lohia, Ld Counsel's for the assessee. Therefore, considering the FAR analysis in favour of the assessee, we direct the TPO to exclude the same for the purpose of working out the Arithmetic Mean of the operating margins.
C. Bodhtree Consulting Limited
21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too.
1322. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under:
―29.1 The Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.
29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity.
29.3 .........
30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application.........‖
23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO.
14Accordingly, we dismiss the argument of the Ld DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.
D. E-infochip Limited
24. In this regard, it is the submission of the assessee that this company is not a good comparable as it is engaged in software services and IT enabled services. Accepting the fact that this is a IT product based company, Ld AR mentioned that the segmental information suggests that the revenues earned is below 25%, therefore, it fulfills the relevant filter specified by the TPO. In this regard, Ld DR filed a copy of the financial statement and read out the following.
‖The company is engaged in the development and maintenance of computer software and also manufacturing EVM and VDB electronic Board (Hardware Division). The production and sales of software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain other information as required under paragraph 3, 4C and 4D of Part-II of Schedule VI to the Companies Act, 1956.‖
25. Referring to Schedule-7, Ld DR mentioned that the income from software services for the relevant year is Rs. 21.03 Crs (rounded up) and the software services segment Rs. 17.42 Crs which is much higher than that of the figure of 60 mentioned in the filter and therefore, the company is rightly considered by the TPO as a comparable company. Thus, it meets the FAR analysis studies and also the filters specified in this regard. We agree with the submissions of Sri Jain, Ld DR. Accordingly, the arguments raised by the assessee are dismissed and order of the DRP / TPO is confirmed in this regard.
E. Kals Information System Limited (Seg.)
26. In this regard, Sri Lohia, Ld Counsel for the assessee argues that this company is also engaged in development of software and software products and no segmental details are available.
27. On the other hand, the case of the Revenue is that the revenues on account of software development is 2.05 Crs and there is no breakup for the same to know the revenue's for software services and the software products. Ld DR brought our 15 attention to the details under the head ―inventories‖ and mentioned that Work in Progress is NIL for the period ending March, 2008; but the fact is that there are no segment details relating to software products out of the segmental information under the head "application in software". Considering all the information available in public domain, we are of the opinion that this case cannot be considered as a good comparable. As such, the fact that the company is producing the ERP software products called Shine, the internationally proven ERP software and other software products called Docuflo (Document Management Software) etc are brought revenue to the assessee in the year under consideration. Therefore, considering the absence of data as well as the unfavourable FAR analysis to the TPO, this case cannot be considered as comparable. We direct the AO to exclude the same from the list of comparables.
F. Tata Elxsi Limited (Seg.)
28. In this regard, the case of the Revenue is that the company is engaged in the software development and service segment of the company comprises three services
(a) Product design services (design and development of hardware and software), (b) Innovation design and engineering services (i.e. Mechanical design with a focus on industrial design) and (C) Visual computing labs (i.e. animation and special effects). Further, based on the information available on the company's website, the company is engaged in provision of product engineering services which broadly falls under the ambit of ITES. Based on the above, it is submitted that the software development & services‖ segment of the company comprises of design and development of hardware, software and IT enabled services/activities. Also, there is no sub services break up/ information provided in the annual report or the databases. Accordingly, the company cannot be taken as comparable to the Appellant.
29. On the other hand, Ld DR brought our attention to the segmental reporting data at page 374 and 375 of the paper book and mentioned that the segmental data relating to software development services was alone considered by the TPO. Therefore, the orders of the DRP / TPO do not call any change.
1630. We have heard both the parties and perused the said pages 374 & 375 of the paper book and found that the order of the DRP is reasonable and does not call for any interference. Accordingly, we dismiss the submission of the Ld AR.
G. Infosys Technologies & Wipro Limited
31. On the TPO's selection of the these two companies as good comparables, the case of the assessee is that the Infosys Ltd, being is a giant company with huge turnover, worldwide locations, employees numbers etc, the company should be excluded from the list of comparables. Another reason for exclusion is that the Infosys earns revenue from software products and also the segmental details are not available. Further Ld Counsel submitted that the company renders various services Custom application development, maintenance and production support, package enabled consulting and implementation, technology consulting and other solutions, including business process management and solutions, product engineering solutions, infrastructure maintenance services, operations and business process consulting, testing solutions, and systems integration services. The company also provides a core banking software solution, customization and implementation services etc. On being functionally different, this company cannot be compared to that of the Assessee, who is engaged in software development services only. M/s Infosis Company has a substantial investment in R&D (about Rs 201 crores), develops/owns proprietary products like Finacle. Also, it derives substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite Finacle) whereas the Appellant does not own any intangible. Based on this, Infosys cannot be taken as functionally comparable to the Appellant. In this regard, Ld Counsel relied on the co-ordinate bench decision of the Mumbai Tribunal in the case of Telcordia Technologies India P Ltd vide ITA NO 7821/M2011 (para 7.4 and 7.5), Patni Telecom solutions p ltd 36 CCH 057 (Ahd) (Tribunal) (para 10) etc.
32. Further, referring to the Wipro Limited, Ld Counsel submitted that this company is engaged in the business of providing IT services as well as IT products and no segmental data is available. Further, the company is a leading market player with significant intangibles like Customer related intangibles, marketing related 17 intangibles and Technology related intangibles. Also, the company operates as a full risk bearing entrepreneur and hence applying the same principle as in case of Infosys Technologies Ltd, Wipro Ltd cannot be compared to a risk mitigated captive unit such as the assessee. Further, argued that such giant companies should not be picked up for TNMM studies of the present company with Rs 15 cro or so. In this regard, on the issue of incomparability of the giant company like the Infosys Technologies, Satyam Computers, L & T Infotech etc, he relied on a Delhi Bench judgment in the case of Agnity India Technologies P Ltd vide IT 1204/2011 for the AY 2006-07 to support his case. To support his line of arguments, Ld Counsel furnished copies of certain documents. Further, he also filed first time a chart showing how these two companies are functionally different vide the FAR analysis.
33. Per contra, Ld DR did not agree with the arguments of the Ld Counsel by stating that Infosys Technologies is a good comparable considering the availability of segmental data. He filed a copies of the financial statement and brought our attention to page 52 of the annual reports and demonstrated that the software services were 96.2% and the products is only 3.8% in the ratio of Rs. 15,051 Crs and Rs. 597 Crs respectively. The data on products segment of the company suggest that its segment is far below the 25% filter applied by the TPO. Therefore, this company with segmental data is very comparable considering the filters applied by the TPO. Further, Ld DR filed a chart showing the operating profit ratios over the period since 1997-2010 and reasoned that the turnovers have no effect on the operating profits. Further, he reasoned that brand has no effect on products too. Ld Counsel could not demonstrate with any evidences that the turnovers impact the profits. In this regard, we have perused the cited decision of the Special Bench in the case of M/s. Wills Processing Services (I) P. Ltd vs. DCIT in ITA No.4547 & 4429/M/2012 (AY 2007-2008), dated 1.3.2013 in general and para 46 to 47.3 in particular. The said paras from the order of the Tribunal are read as under:
―46. The Id AR has submitted that due consideration should be given to the fact that the company possesses brand value which will directly impact the margins of the company. He has further submitted that the turnover of this company as very high in comparison to the assessee. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the decision in the 18 case of Capital lQ Information (supra) as well as the decision of the Bangalore Benches of the Tribunal in the case Trilogy E Business.
46.1 On the other hand, the Id DR has submitted that the turnover has no direct relation with the margin. He has submitted comparative details of various companies having different turnover and submitted that it is clear from the table as well as the graphic chart that high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions P Ltd in ITA No.7894/Mum/2010 dt 31.5.2011 46.2 In rebuttal, the Id AR has submitted that in the case of Actis Advisors P Ltd (supra), the Tribunal has excluded this company on the ground of high turnover in para 31. He has also referred the Rule 1OB(2) and submitted that the factor for comparability of an entity includes the size of markets; level of competition; assets employed for services. Therefore, the high turnover shows the size of market of the company is larger than the assessee. Similarly, the asset employed for services are also significantly more in comparison to the assessee. Hence, this company cannot be treated as a comparable.
47 We have considered the rival submissions as well as the relevant material on record. The assessee has mainly emphasized the objection of high turnover of Infosys BPO Ltd in comparison to the assessee; therefore, this company cannot be treated as a comparable. The reliance was placed on the decision of the Hyderabad Benches of this Tribunal in case of Capital IQ Information (supra) as well as in the case of Agnity India Technologies (supra) 47.1 We note that in the case of Capital IQ Information (supra) the Tribunal has relied upon the decision in the case of Agnity India Technologies (supra) as well as in the case of Triniti Advanced Software Labs P Ltd (supra). We further note that all these decisions have primarily relied upon the decision of Bangalore Benches of this Tribunal in the case of Genesys Integrating Systems India P Ltd(supra) which has been relied upon by the Tribunal in case of Capital IQ Information in para 21 as under:
―21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having highJLlr over of over Rs.200 crores as against the assessee's turnover of only Rs. 60 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies P. Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows-
―5.2. Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Sat yam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Sat yam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded.‖ 19 Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs P. Ltd. (supra). In the case of MIs. Genesys Integrating lndia P. Ltd. (supra), the Ban galore Bench of the Tribunal has observed in the following manner-
―9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the cam parables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from cam parables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8. 15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.
In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid three companies cannot be treated as comparable, considering their substantially high turnover as compared to that of the assessee. We also agree that the turnover filter of Rs I crore to Rs 200 crore as applied by the ITAT Ban galore Benchin the aforesaid decision, should also apply to the facts of the present case, considering the assessee's turnover of mere Rs.60 crores. We therefore, hold that companies having turnover of Rs 1 crore to Rs.200 crore alone can be considered as comparable, in the case of the assessee.‖ 47.2 In the case of Integrating Systems India P Ltd(supra) , the Tribunal has made a classification of company is having turnover of Rs. 1 crore to Rs 200 crores as the comparable range of size of companies and further from Rs. 200 crores to Rs. 2000 crores as another slab of turnover. This classification is based on dun & Bradstreet having given different ranges of size of companies i.e. large, medium and smaller.
Such classification by dun & Bradstreet was not made in the context of coOmaprables under T P Regulations.
47.3 It is pertinent to note that as per this classification of the company on the basis of turnover from Rs 1 crore to Rs 200 crores, an entity having Rs 1 crore can be compared with an entity having Rs.200 crores turnover ; but at the same time, an entity having Rs 200 crores turnover cannot be compared with the entity having Rs 201 crores turnover. Thus, this classification gives unrealistic result as far as the comparability of two entities having difference of Rs. one crore only cannot be compared. In our view for the purpose of comparing the profit margin of functionally similar entity the classification of such slab range is not practically workable. Therefore, as it is apparent from this classification that two entities can be compared having difference in the turnover upto Rs. 199 crores; but at the same time, cannot be compared even if the difference of turnover of one cr. Therefore, with due respect, we are unable to accept such classification of comparables on the basis of fixed slabs of turnover.‖
34. On hearing both parties, we find the case of the assessee is that the giant companies namely, Infosys Technologies and the Wipro Ltd are not good 20 comparables on the grounds of the nature of services, risk profile, revenues, ownership of intangibles, onsite vs offshore works, expenditure on advertising, sales promotion and R& D developments etc. He also mentioned that the turnover constitutes one of the contributors of the giantness of a company. Assessee relies on the judgment of the Delhi High court in the case of Agnity India Technologies P Ltd, supra. On the other hand, the case of the revenue is that the said judgment of the Delhi High court do not refers to the turnover function in the order. Further, Ld DR for the revenue is of the firm opinion that the turnover and intangibles do not contribute to the ‗operating profits' of a company. It is the argument of the Ld DR that when assessee contends that a comparable is not good one for any reasons, the onus is on the assessee to demonstrate that the ‗turnover' factor has impact on the ‗operating profits' of the company and relies on various orders of the tribunal cited above. Regarding the delhi high court's judgment in the case of the Agnity India Technologies P Ltd, supra, it is the contention of the Ld DR that the ‗giantness' is different from the ‗turnover' of the company. Considering the absence of proper discussion in the orders by the TPO/DRP and also in view of the additional information / Charts furnished by the Ld AR, these comparable ie Infosys Technologies and the Wipro Ltd, may be referred to the files of the TPO for fresh consideration and examination. We have perused the orders of the revenue and the documents placed before us. We have also gone through the charts and the copies of the financials placed before us. It is our prima facie opinion, that the orders of AO/TPO/DRP do not contain reasoning for inclusions of these two comparable. Evidently, they do not contain any reasoning rejecting the objections raised by the assessee. Regarding the additional papers and charts filed before us, considering the deficiencies noticed in the said orders of the DRP/TPO/AO,in our opinion, for want of clear finding on the FAR analysis of these two companies, they need to be remanded to the AO for reconsideration and fresh decisions after considering the cited decisions both of the Honble High Court of Delhi and the Tribunal . Further, on the issue of ‗giantness' referred above, we find the same refers to the generic function and the turnover constitutes one of the factors contributing to the giantness. There is need for analysis of the segmental data of these comparable qua that of the 21 assessee. Considering various decisions of the Tribunal cited above, assessee needs to demonstrate that the turnover factor influences the operating profits of the said comparables. Therefore, in our opinion, we should set aside the finding of the DRP/TPO/AO on these two comparables ie Infosys and Wipro Ltd and remand the matter to the AO for fresh examination and finding on the dispute raised before us. Accordingly, this part of the ground is allowed for statistical purpose.
35. Ground no.9 relates to non-consideration of certain additional companies supplied by the assessee during the proceedings before the DRP. In this regard, the relevant directions of the DRP reads as under:
"15.3. Directions of the DRP: The arguments of the assessee are untenable. The T.P.O. has arrived at a certain set of comparables based on search criteria, keywords and filters from databases having reputation and acceptability. After having arrived at the dataset, it is not open for the assessee to suggest inclusion of further concerns as comparables. If such a plea is allowed, there will be no end to the ALP computation and updation process. Hence, this Panel is of the opinion that the claim of the assessee for inclusion of certain ‗comparable' entities handpicked by it is not feasible. So far as plea of taking correct updated margin is concerned, the AO/TPO is directed to verify the same & corrected / updated margins be taken while re-computing ALP.‖
36. From the above, it is evident that the DRP rejected the claim of the assessee stating that there will be no end to ALP computation and updation process, if the said comparables are accepted at this stage.
37. Before us, Ld Counsel is critical of the said directions of the DRP. Per contra, Ld DR mentioned that the DRP is correct in rejecting the same. Referring to the profit percentages of three companies of the list under consideration, Mr Jain mentioned that they are not the choices of the assessee initially. They are furnished by the assessee at the later stages of the assessment, considering the timing, the said comparables should not be permitted. Referring to the profit percentages of at least three of such companies, Ld DR mentioned that they are loss companies, and such loss making ones should not be deemed as good comparable considering the TNMM method with OP/TC as the PLI. In this regard, he relied on various decisions in this regard.
38. We have considered the arguments of the parties and the papers filed before us, in our view, in view of both timing of submission as well as the loss making 22 nature of the companies, in our opinion, the arguments of Sri Jain should be upheld. As such there is no explanation before us as to why such losses are caused when they are otherwise functionally comparable. As such, it is a settled proposition that loss and super profits are the extremities and the onus is on the assessee to explain the reasons with evidences to substantiate these extreme results ie loss and super profits. The judgment on the inclusion or exclusion depends on the data and the applicability of the specified conditions in the said clauses. Whoever demands for or against such exclusion or inclusion, he needs to demonstrate with facts and reasons in support of the claim. Normally, as per the OECD TP guidelines, the losses or unusual profits/losses constitute extreme results and such results demands further examination into the reasons for such results. If such examination results in detection of the cogent reasons causing such losses there is need for adjustments to the margins or exclusions of that case for the purpose of comparability studies. Reliance is placed on the order of the Tribunal in the case of Willis Processing India P. Ltd., 30 Taxmann.com 350 Mum and the decision of Delhi Bench in the case of Sapient Corporation Pvt. Ltd reported in 46 SOT 60 (Del). Therefore, in principle, we appreciate the argument put forwarded by the Sri Ajeet Jain, Ld CIT DR and in favour of the Revenue. At this stage, we do not want to get into the debate on the issue of current year loss vs persistent loss and it is no body's case before us. Considering the reasoned directions of the DRP and the arguments of Sri Jain CIT- DR, we are of the opinion that the ground 9 raised by the assessee is dismissed.
39. Ground no.10 relates to incorrect computation of the operating margins. The facts and the arguments of the assessee read as under:
―The Assessee submits that there are certain errors mistakes in the computation of the Assessee's operating margin done by the learned TPO/ Hon'ble DRP. While Hon'ble DRP has accepted the ground relating operating nature of service charges, it has not accepted the contention that foreign exchange loss pertaining to interest payments needs to be considered non-operating in nature while computing the operating margins of the Assessee. The revised margin of the Appellant as per the directions of the Hon‟ble DRP works out to be 9.23% as against 11.22% claimed by the Assessee before the Hon‟ble DRP.
In the profit and loss account of the Appellant for FY 2007-08 (Schedule 12 --Other Income) the ‗Exchange Gain' amounting to Rs 1,064,713 consists of foreign exchange gain on sales amounting to Rs 3,840,402 and foreign exchange loss on interest on loan payables amounting to Rs 2,775,689 (3,840,402 minus 2,775,689 equals to 23 1,064,713. The foreign exchange loss on interest on loan payables being non- operating in nature should be excluded from the computation of the operating margin of the Appellant. The learned TPO has rightly considered interest on term loan as a non-operating expense and the foreign exchange loss on interest on loan warrants a similar treatment. Taking the same into consideration the Appellant has submitted the correct operating margin vide Paper book-l dated 6 May 2013 (page 283 to 288).
The approach adopted by the learned TPO was upheld by the Hon'ble DRP relying on Special Bench decision in case of ACIT vs Prakash .1 Shah (306 ITR 1). It may be noted that the reliance placed by the Hon'ble DRP on the said decision is misplaced since in that case issue pertains to characterization of income under the head ―profits and gains from business and profession‖ vis-ã-vis ―income from other sources‖ and further, the foreign exchange fluctuation was pertaining to export turnover. However, in the present case, the issue is regarding operating vis-ã-vis non-operating nature of foreign exchange loss and further the said foreign exchange loss pertains to interest payments (ie finance costs).
Considering the above, the Appellant request your Honors to direct the AOlTPO to consider the exclude the foreign exchange loss pertaining to Interest payments from cost while computing operating margin of the Appellant since the same Is non- operating in nature.‖
40. Fromm the events narrated above, it is evident that the TPO considered the interest on the loan as the non-operating one and however, he considered the related Foreign Exchange Loss as the operating expense. Consequently, the issue is raised here for adjudication. After hearing the Revenue on this issue, we are of the opinion that there is merit in the above submissions of the assessee and the TPO is directed to give favourable consideration to the submissions of the assessee, in this regard. Accordingly, we direct the AO to exclude the foreign exchange loss pertaining to the interest from the operating cost for working out the operating margins for the purposes of ALP. Accordingly ground no.10 is allowed.
41. Ground no.11 relates to the need for granting adjustments towards working capital and risk. In this regard, assessee submitted that considering the functional and risk profile of the assessee on the comparables, there is a need for carrying our working capital adjustments and the risk adjustments. Accordingly, assessee claimed working capital adjustment of 1.56% and the risk adjustments of 7% to the ALP margins on 23.32% determined by the TPO. In this regard, the direction of the DRP given in para 17.3 and the same reads as under:
24"17.3. Directions of the DRP:
This Panel has considered the matter and is of the firm opinion that the arguments of the assessee are not very relevant because the assessee belonging to the renowned Nethawk group has a brand value and prestige in the global LT. market including India. The assessee or its Group is not a common LT. firm in the market due to its past reputation and global recognition and acceptability. Therefore, the loading of huge costs in terms of economic adjustments (Working capital adjustment of 1.56% and risk adjustment of 7.00%) as made by the assessee is unnatural and unacceptable. Further, this Panel holds that the claim of the assessee for working capital and risk adjustment for the difference between the comparables and tested party is not tenable since it has failed to produce any evidence supporting the workings of any such adjustment. We agree with the T.P.O. that the data used by the assessee in the workings are not reliable and therefore, liable to rejection.
Also that, the assessee has made adjustments on its own will without collecting any information regarding comparables. However, the law permits adjustments only to comparables and not on the basis of whims of assessee. The assessee has failed to furnish data regarding comparable economic costs and adjustments made in similar line of business.
Hence, keeping in view the above factors, there is no case for working capital and risk adjustments and the Assessing Officer is directed to proceed as per the Order of the T.P.O.‖
42. During the proceedings before us, Ld Counsel explained the working capital adjustments, which is warranted for mitigating the differences in amounts receivable and amounts payable in the books of the party vis-à-vis comparable companies and provided methodology for computing the same. Further, he relied on various decisions to support his case. In this regard, he brought our attention to the workings of the working capital adjustment placed at 297 and 298 of the paper book. Regarding risk profile, assessee submitted that risk adjustment is required for entrepreneual and business risk borne by the company such as market risk, services liability risk vis-à-vis comparable transactions. In this regard, Ld Counsel relied on the decision of the ITAT, Bangalore Bench in the case of Philips Software Centre Private Ltd vs. ACIT vide ITA No.218(BNG)/2008 (AY 2003-2004). Accordingly, he worked out the 7% of the risk adjustments. He also mentioned that up to 20% risk adjustment is allowed as pronounced in the case of Sony India (P) Ltd v DCIT (114 ITD 448). Accordingly, it is the case of the assessee that the risk adjustments in the case of the assessee would be approximately 4% to 7%. Referring to the DRP's reasoning for rejection of the risk adjustment i.e., assessee failed to provide the relatable data of the comparables, Ld Counsel mentioned that the assessee has already submitted method computation of adjustment of working 25 capital and risk. At the end, it is the prayer of the assessee that the DRP is silent by not passing a speaking order vide page 297 and 298 and seeks direction from the Tribunal on adjustments on accounts of WC and Risk.
43. On the other hand, Ld DR vehemently argued stating that the onus is on the assessee to demonstrate, in principle, there is need for adjustment for the said adjustments. In this regard, Ld DR brought our attention to various decisions to demonstrate one such is the decision of ITAT, Mumbai in the case of M/s. Wills Processing Services (I) P Ltd vs. DCIT vide ITA No.4547 & 4429/M/2012 (AY 2007- 2008), dated 1.3.2013 and para 57 to 58.3 of the said order of the Tribunal is relevant in this regard. Bringing our attention to the said paragraphs of the Tribunal's order (supra), Ld DR mentioned that assessee is required to demonstrate the existence of risk before the revenue authorities. As per these decisions, granting adjustments to WC and Risk factors is not an automatic process and like granting a standard deduction. There are no safe harbors specified on these adjustments. He relied on another order of the Tribunal in the case of decision of the Tribunal in the case of M/s. Premier Exploration Services Pvt. Ltd vs. ITO vide ITA No.4935/Del/2011 (AY: 2007-2008), order dated 31.5.2013 for the proposition that the risk adjustments cannot be allowed as a general rule and the assessee is under obligation to demonstrate the existence of risk with the help of data and they are materially affect their margins. The tax payer needs to demonstrate that the risk is translated into charging a higher margin in comparable companies. In these circumstances, the Tribunal has considered the fact of single customer like assessee, a service provider.
44. We have heard both the parties and perused the cited decisions as well as the contents of page 297 and 298 of the paper book which provides for method of computation of working capital and risk adjustments. On perusal, it is noticed that the orders of the Revenue do not contain the relevant analysis before rejecting the claim of the assessee in this regard. We have also noticed that there are certain decisions favourable on both sides. Considering the non-speaking order of the DRP and TPO in this regard, we find it necessary to remand the matter to the files of the 26 AO for adjudicating the issue afresh after considering the relevant decisions in the matter. Accordingly, this part of the ground is remanded to the AO/TPO for fresh adjudication after granting a reasonable opportunity of being heard to the assessee.
45. In the result, the appeal of the assessee is partly allowed.
Order is pronounced in the open court on 6th November, 2013.
Sd/- Sd/-
(B.R. MITTAL) (D. KARUNAKARA RAO)
न्मायमक सदस्म / JUDICIAL MEMBER रेखा सदस्म / ACCOUNTANT MEMBER
भुंफई Mumbai; ददनाुंक Dated 06.11.2013
व.यन.स./ OKK , Sr. PS
आदे श की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to :
1. अऩीराथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमक्त(अऩीर) / The CIT(A)-
4. आमकय आमक्त / CIT
5. ववबागीम प्रयतयनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR,
ITAT, Mumbai
6. गाडड पाईर / Guard file.
सत्मावऩत प्रयत //True Copy//
आदे शानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt. Registrar)
आयकर अिीऱीय अधिकरण, भुंफई / ITAT, Mumbai