9911796707
TMI Blog2017 (11) TMI 1360X X X X Extracts X X X X X X X X Extracts X X X X ..... l set of comparables b. not excluding interest income in the cases Kuliza Technologies Pvt. Ltd. and Inteq Software Ltd. 2. For that the Assessing Officer erred in assessing the total income of the Appellant at Rs. 1,91,03,939/- as against the total income of Rs. 40,62,622 computed by the Appellant under the normal provisions of the Act. 3. For that the Authorities below erred in rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and in making an adjustment of Rs. 14,741,337/- to the international transactions with Associated Enterprise. 4. For that the Transfer Pricing Officer erred in not providing the detailed search process for selecting his own set of companies which he considered as comparables during the transfer pricing proceedings and also erred in conducting fresh search and economic analysis. 5. For that the Authorities below erred in rejecting the use of multiple year data despite the Appellant demonstrating the circumstances warranting use thereof. Rejection and inclusion of comparable companies 6. For that the Authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid revised grounds of appeal can be conveniently decided together with the grounds raised by the revenue which read as follows :- "1. Whether on the basis of facts and in circumstances of the instant case, the Ld. DRP, Kolkata has erred in directing to allow foreign exchange loss as nonoperating income for the purpose of computation of Profit Level indicators (PLI) of the comparables without appreciating the facts in case to case basis as to whether such loss has arisen in the normal course of business and not resulted from speculative transaction or otherwise. 2. Whether on the basis of facts and in circumstances of the instant case, the Ld. DRP, Kolkata has erred in directing to allow bad debts as non-operating income for the purpose of computation of Profit Level indicators (PLI) of the comparables without appreciating the facts in case to case basis as to whether bad debts has arisen in the normal course of business and not resulted from speculative transaction or otherwise. 3. The appellant craves leave to amend, modify or alter any grounds of appeal during the course of hearing of this case." 4. The aforesaid grounds of appeal are with reference to the determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.64%, the assessee claimed that the transactions with the associated enterprises was at arms length. The profit margin of the comparable companies chosen by the assessee in its transfer pricing study is as follows :- Sl. No. Name of the company FY. 2007-08 FY. 2008-09 FY. 2009-10 Weighted average of operating profits on operating costs (%) 1 Akshay Software Technologies Limited 6.054% 10.993% NA 8.91% 2 Ancent Software International Ltd -19.356% -8.212% NA -13.88% 3 Aztecsoft Limited 2.502% 3.671% NA 3.16% 4 CG-VAK Software & Exports Limited (Segmental) -7.900% 3.993% -13.849% -5.46% 5 Goldstone Technologies Limited 20.037% -10.216% NA 8.52% 6 Helios & Matheson Information Technology Limited 30.145% NA 13.199% 19.64% 7 Indium Software (India) Limited -3.483% -13.391% NA -7.85% 8 Infosys Technologies Limited 36.442% 39.612% 44.476% 40 48% 9 K P I T Cummins Infosystems Limited 9.274% 9.594% NC 9.45% 10 Larsen & Toubro Infotech Limited 14.337% 13.806% 16.904% 14.99% 11 LGS Global Limited 23.144% 14.365% NA 17.97% 12 Mindtree Limited (Segmental) 13.110% 1.731% 17.004% 9.79% 13 Persistent Systems Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 18.75% 4 CTIL Ltd. 19.56% 5 Infinite Data Systems Pvt. Ltd. [Merged] 88.25% 6 E-Infochips Bangalore Ltd. 71.92% 7 Thirdware Solutions Limited 33.36% 8 Thinksoft Global Services Ltd. 17.35% 9 Inteq Software Ltd 49.91% Average 40.34% 20. Therefore the calculation of the adjustment in the case of the assessee is as follows : Description Amount (Rs.) Software Development Service 14,01,82,916/- Operating Revenues 14,01,82,916/- Expenses debited to P&L account 11,52,45,297/- Operating Expenses 11,52,45,297/- Operating Profit 2,49,37,619/- OP/TC (PLI) 21.63% OP/OR 17.78% 21. Since the adjustment is less than +/-5% limit, in view of the facts of the case, upper Adjustment is proposed to be made to the total income of the assessee. 22. It is hereby clarified that the findings and discussions made in this order are applicable only in respect to reference received for A.V 2010-11 and shall apply accordingly. (TOTAL UPWARD ADJUSTMENTIN RESPECT OF MARKET SUPPORT SERVICE: Rs. 2,15,52,333/-)" 7. Aggrieved by the determination of the arms length price by the APO as above the assessee filed objections before the Dispute Resolution Panel (DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same are being considered in respect of Akash Software Technologies Ltd. The AO has not given detailed reasons for holding that this company was functionally non-comparable. It is seen from its annual report that this company has revenue primarily from software services and only .07% revenue is earned from sale of products. Further this company has been taken as comparable in the case of SDS and has similar activities to that of E-Infochips Pvt. Ltd which has been taken by the TPO as comparable. The TPO is accordingly directed to include this company as a comparable provided it qualifies all other filters adopted by the TPO." 10. It can be seen from the aforesaid directions of the DRP that instead of mentioning Akshay Software Technologies Ltd., the DRP has given a different name Akash Software Technologies Ltd. For this reason the AO in the order giving effect to the directions of the DRP had not considered Akshay Software Technologies Ltd., as a comparable company. The assessee filed an application u/s 154 of the Act dated 13.05.2015 before DRP pointing out this apparent error. The DRP has however not acted on this application. The ld. DR submitted the functional profile of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the business of the assessee cannot be considered to be part of its operating income. Apart from the above it is also seen that at page 8 para 5.2, the TPO himself in the last sentence has set out what are not operating income and has given some examples. One such example of income which is not operating in nature as set out by the TPO himself is interest income. It thus appears that even the TPO accepted the fact that the interest income in question cannot form part of the operating income of the assessee for the purpose of working operating profit to operating cost. Keeping in mind, the above circumstances and the judicial precedent set out above, we are of the view that the interest income in question should be excluded while working out operating profit to operating cost of the aforesaid two comparable companies Kuliza Technologies Pvt. Ltd., and Inteq Software Ltd. This finding is without prejudice to the comparability of Inteq Software Ltd., which is challenged by the Assessee in Gr.No.6 before us. 13. Grounds No.2 and 3 raised by the assessee are general in nature and calls for no specific adjudication. 14. Ground No.4 was not pressed by the ld. Counsel for the assesee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad reported NCP of 88.25%. It is not in dispute that the assessee is engaged in software development. Hence, comparable should also be in the companies engaged in the similar section. We find that this company is having a different business model and engaged in providing entire gamut of solutions comprising of technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. We find from the paper book that the Revenue is primarily derived from technical support and infrastructure management services. We find that Infinite Date Systems Pvt. Ltd. commenced its operation on 1st January, 2009 and as per segment reporting disclosure, the company's operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. Further, as per the Annual Report of 2009, at Page 1, it is stated that the Holding Company M/s Infinite Computer Solutions ((India) Limited signed an agreement (Build, Operate and Transfer - BOT Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o follow a certain procedures, the AO has simply followed the TPO order. Therefore, order of the AO on this issue needs to be set aside. In the case of Hyundai Motors India Engg. (P) Ltd. (2015) 64 taxmann.com 442 (Hyd.- Trib), which is also engaged in rendering of ITES to its AEs, the Tribunal has taken note of the same at para 9.1. and 9.3 of its order. Therefore, the decision of the Tribunal in the said case is applicable to the case on hand, more particularly since the comparables adopted by the TPO in the said case are the same in the assessee's case also. In the case of Hyundai Motors India Engg. (P) Ltd. (supra) at page 20, para 18, the Tribunal has held as under: "18. As regards M/s Accentia Technologies Ltd., is concerned, we find that the DRP has directed to exclude this company by placing reliance upon the order of the ITAT in the assessee's own case for the A.Y. 2009-10 by holding that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy and considering the profit margins of the company and insufficient segmental data, held that his company cannot be selected as a comparable. It was also held by the DRP th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS international are not available in the annual report. The exceptional circumstances of the company reported in annual report such as acquisition of India based captive business outsourcing arm, resulting in acquisition of an aggregate amount of $ 2.5 billion over a period of 9.5 years and its impact on the financial implications of the company also brought to our notice. It is submitted that these peculiar circumstances have been considered by the Coordinate Bench of this Tribunal in the case of Hyundai Motors India Engg. (P) Ltd. (supra) for exclusion of the list of comparables. Respectfully following the decision of the Bench, these two comparables TCS eserve International Ltd. and TCS e-Serve Ltd. directed to be excluded. In view of the aforesaid findings and judicial precedent relied upon, we hold that the comparable chosen by Ld. TPO i.e. Infinite Data Systems Pvt. Ltd. (Merged) is functionally not comparable with the assessee company." 17. Following the aforesaid decision of the Tribunal we are of the view that EI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out, it would be safe not to act on such data. We do not wish to go into the question whether the TPO can rely on secret comparables. On the facts available on record it transpires that no reliable data have been brought on record to substantiate the margin of 49.91% determined by the TPO for this company. In these circumstances we direct that Inteq Software Pvt. Limited be excluded from the final list of comparable companies to be adopted by the TPO for arriving at the average margin of comparable companies. 19. As far as Gr.No.7 challenging the inclusion of M/S.Infinite Data Systems Pvt.Ltd. (since merged) in the final set of comparables for the purpose of determining the Arithmetic mean of comparable companies, the plea of the Assessee is that this company is not functionally comparable with that of the Assessee and also for the reason that this company has earned supernormal operating margin. At the time of hearing the learned counsel for the Assessee brought to our notice a decision of the ITAT Kolkata Tribunal in the case of M/S.Labvantage Solution Pvt.Ltd., Vs. DCIT ITA No.617/Kol/2015 order dated 19.10.2016. The Assessee in that case was also a company engaged in the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormally his . Such companies which are making more than twice the arithmetical mean margin computed by the Id TPO should not be considered as comparable. The ld AR referred t page 591 of the Paper Book where the details of the fluctuation in the revenue, profit an margins has been provided. Accordingly, he prayed for rejection of this comparable." 20. The aforesaid reasoning of the Tribunal which decision was also rendered in a case relating to AY 2010-11 will equally apply to the case of the Assessee in this appeal also as the functional profile of the Assessee and that of the Assessee in the decision cited by the learned counsel for the Assessee are one and the same. We therefore direct that M/S.Infinite Data Systems Pvt.Ltd., be excluded from the list of comparable chosen by the TPO. Gr.No.7 raised by the Assessee is accordingly allowed. 21. As far as Gr.No.8 raised by the Assessee seeking exclusion of Thirdware Solutions Ltd., and Com-U-Learn Tech India Ltd., in the final set of comparables chosen by the TPO is concerned, the plea of the Assessee is that these companies are not functionally comparable with that of the Assessee. It is the plea of the Assessee that this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. We further observe that assessee has referred and relied on various decisions of Co-ordinate Bench wherein it has been held that Thirdware Solution is not a good comparable for the purpose of T.P. adjustment with regard to the assessee engaged in the business of software development. We observe that Co-ordinate Bench Delhi in the case of ION Trading India Private Ltd. vs. ITO in ITA No.1 035/0el/2015 for Asst. Year 2010-11 has held as under :- "56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in account with the assessee which only provides software development in the finance domain as per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of software products which apparently cannot be a comparable to assessee dealing with contract software development and not into sale of any product. Therefore, we direct TPO/AO to exclude this company from the list of comparables." (emphasis supplied by us) 13. Respectfully following the decision of the Co-ordinate Bench referred above in para 1 0,11 & 12, we find that the same are squarely applicable to the facts of the assessee to the extent that assessee is also engaged in software development valuation of production works of computer software and operates mainly on the instructions of its associate enterprises whereas the impugned comparable Thirdware Solution is additionally also in the business of enterprises whereas the impugned comparable Thirdware Solution is additonally also in the business of trading of software outsources it activities. We are, therefore, of the. view that Thirdware Solution is not a fit comparable in the case of assessee for the purpose of making T.P. adjustment. We allow this ground of assessee." 23. Respectfully following the aforesaid decision, we direct exclusion of Thirdware Solution as a comparable by the TPO for arriving at arithmet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e file of AO/TPO to examine the available data in public domain/or obtaining information U/s. 133(6) of the Act for segmental information pertaining to software development services and then decide after giving due opportunity to Assessee whether the said company can be selected as comparable. For the time being, Assessee's objections are considered valid and issue is restored to the file of AO for undertaking analysis afresh as far as this company is concerned." 26. Respectfully following the decision of the Tribunal, we direct the TPO to exclude this company from the list of comparables for the purpose of determining ALP. 27. As far as Gr.No.9 raised by the Assessee is concerned, the challenge to including Kuliza Technologies Pvt.Ltd. as a comparable company was not seriously contested and therefore the same is directed to be retained as a comparable. The Assessee has however pointed out that the OP/OC of this company has been wrongly calculated by the TPO by considering the Bad Debts of this company as part of the non-operating profit of the Assessee. In this regard, we have noticed that the TPO in his order at page- 8 paragraph 5.2 has observed that certain items of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, it is seen that the analysis in respect of this comparable was made in the transfer pricing order for the assessee for last year, in respect of the margins of this entity and the same is reproduced below: Revenue in Lakhs Revenue in Lakhs Profit in Lakhs Profit Margin Mar-05 397.86 14.15 3.56% Mar-06 422.31 3.79 0.90% Mar-07 425.92 20.5 4.81% Mar-08 508.97 -10.22 -2.01% Mar-09 637.29 -15 -2.35% Mar-10 511.5 -73.44 -14.36% Mar-11 569.89 -21.09 -3.70% Mar-12 639.79 -114.73 -17.93% From perusal of the above analysis, it can be seen that the company has stated making losses in the year ending March 2008, a trend which continues for subsequent years and is being continued till date. This clearly imply that in the period under consideration also the conditions were such that the entity may be on the verge of closure, under -utilization of assets or human resources which have been created/recruited earlier. Most of these exceptional circumstances are not quantifiable so as to see the effect on their profitability based on the date available in the public domain. As reasonable adjustments cannot be made to account for these differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (segmental) 6,52,29,000 89,53,000 7,41,82,000 Operating expenses as per P & L 7,43,01,569 Expenses to be allocated from P & L to segmental expense Allocation as a percent of sales) 1,05,338 14,231 1,19,569 Total operating expenses 6,53,34,338 89,67,231 7,43,01,569 Segment cost Total operating cost 87.93% 12.07% Operating profit (A-B) 34,59,238 3,27,010 37,86,248 Operating Profit Total operating cost 5.29% 3.65% 5.10% It can be seen that the assessee has considered an amount of Rs. 50,64,576/- out of total amount of Rs. 57,48,817/- as allocable to this segment, which has lead to the conversion of negative PLI to positive. The details of this expenditure, as extracted from the Annual report is as given below: SCHEDULE TO ACCOUNTS Schedule 31-Mar-2010 Rs 31-Mar-2009 Rs 12 Income from Software Development, Product & Services Overseas: Onsite Software Services 54,34,341 2,32,41,620 Offshore Software Services 4,37,74,635 3,98,35,200 Business Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the software development segment of this company, is considered and if foreign exchange gain/loss is considered as part of the operating profit than this company's profit margin for FY 2008-09 would be 5.29%. The DRP however upheld the order of the TPO observing that this company was a consistent loss making company. 30. Before the Tribunal the submission of the learned counsel for the Assessee upon for reiterating submission made before DRP was that the DRP in page-29 of its direction while working out the margins of another comparable company Kuliza Technologies Pvt. Ltd., has accepted foreign exchange gain to be part of the operating profits. It was submitted that foreign exchange gain arising out of transactions of rendering software development services should be considered as part of the operating profit and the law in this regard is well settled. Reference was made to several judicial pronouncements in this regard especially the decision of the Bangalore ITAT in the case of SAP Labs (P) Ltd. Vs. ACIT 44 SOT 156 (Bang.) wherein it was held that foreign exchange gain should be included while computing operating margin of comparables as well as that of the Assessee for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development service provider as there were expenses relating to media and therefore this company was considered as also in the business of media services. The absence of segmental data was also given as a reason for not regarding this company as a company in software development service sector. The DRP also accepted the stand of the TPO. 33. Before us the learned counsel for the Assessee drew our attention to pages 754, 759, 763 and 764 of paper book Vol-II filed by the Assessee as also pages 159 and 209 of paper book Vol.-I filed by the Assessee. Perusal of these documents shows that the income as per the profit and loss account as on 31.3.2010 of this company was Rs. 24,04,76,948 out of which income from rendering software services was 23,18,69,452/-. Out of the income from software services, income from export of software is Rs. 20,75,99,979/-. Thus this company satisfies the test of being a predominant software service exporter such as the Assessee. The related party transaction of this company is 10.71% which is well below the 15% mark. If related party transactions are more than 15% than the company will be excluded from comparability for the reason that the operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing advertising/marketing, the assessee has requested for necessary market risk adjustments (please refer to Ground No.10 below) The TPO has not argued that comparable companies are functionally different. Hence, rejecting the comparable companies by putting additional filter is not justified. Additional filter reduces the number of comparables available which are otherwise functionally comparable. The OECD Guidelines 2010 which acknowledges the need for broadening the search criteria to accommodate for the limitations in available comparables. The relevant extract from the OECD Guldel.ncs 2010 is as follows: "3.38. The identification of potential comparables has to be made with the objective of finding the most reliable data, recognising that they will not always be perfect. For instance, independent transactions may be scarce in certain markets and industries. A pragmatic solution may need to be found, on a case-by-case basis, such as broadening the search and using information on uncontrolled transactions taking place in the same industry and e comparable geographical market, but. performed by third parties that may have different business strategies, business: models or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rejection of companies having ratio of advertising, marketing and distribution expenses to sales more than 5%. Normally a company having high ratio of these expenses would be engaged in selling of products on a substantial scale. Obviously such a company would not be functionlly similar to a software services providing company like the Assessee. Therefore, the TPO was justified in applying this filter as well. The TPO was also justified in applying filter for rejecting companies where export earning was 75% of the sales as this criteria has been applied by the TPO resulting sufficient number of comparables therefore there was no reason for further relaxation. Therefore, the objection raised by the assessee in respect of these filters cannot be upheld. In view of the above discussion, the objections raised by the assessee against the rejection of its TP study by the TPO and use of new quantitative and qualitative filters used by the TPO do not stand the analysis of merits and therefore, rejected. Action of the TPO is upheld." 36. The learned counsel for the Assessee did not dispute the proposition that the filter of rejecting companies with the ratio of advertising spend being m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned DR made in this regard. The logic in the exercise of finding out the AMP expenses towards creation of marketing intangibles for the foreign AE starts with the expenses which are otherwise in the nature of advertisement, marketing and promotion. If an expenditure itself is not in the nature of advertising, marketing or promotion, that ought to be excluded at the very outset. We, therefore, reject this contention raised by the learned DR. 18.6. As we are presently considering the term "advertisement marketing and promotion expenses', which is analogous to, if not lesser in scope than the term 'advertisement, publicity and sales promotion' as employed in the erstwhile subsec. (3B) of sec.37, all the judgments rendered in the context of sub-sec. (3A) & (3B) of sec. 37 will squarely apply to the interpretation of the scope of AMP expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be within the ambit of "advertisement, marketing and promotion expenses" for determining the cost/value of the internal transaction. 37. It was submitted that if sales expenses are excluded than the percentage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit margins. If such authentic data for culling out the profit margins are not available, then it would be safe to exclude this company from the list of comparable companies. With these observations the comparability of this company is set aside to the TPO/AO for adjudication afresh after affording opportunity of being heard to the Assessee. 40. As far as Gr.No.14 raised by the Assessee is concerned, the same projects the grievance of the Assessee in the action of the TPO and DRP in rejecting Mindtree Ltd., and Quintegra Solutions Ltd., from the list of comparable companies on the ground that there were exceptional circumstances that prevailed in the affairs of these two companies during the relevant financial year the results of which were taken up for comparison. It is undisputed that Mintree Ltd., amalgamated with Aztec Software Ltd., during the previous year and due to this factor accurate adjustment cannot be given to the operating margins by eliminating factors which would contribute to low or high profit margins. In the case of Quintegra Solutions Ltd., this company acquired some other companies and the real operating margins of these two companies could not be arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working capital adjustment. The case of the assessee is that working capital does have an impact on the profitability of the company and more accounts receivable in case of a company would mean relatively lower profit. Therefore, the companies could be considered as fully comparable if they hold the same level of account receivable and account payable. The TPO has, however, rejected the claim of working capital adjustment which has been upheld by the DRP. The reason given by the authorities below is that the assessee had not made any claim for working capital adjustment in its TP study and that it is not possible to make accurate adjustment on this account as it is difficult to find the account receivable/payable at different points of time during the year. The Id. Sr. Counsel has referred OEC D guidelines as per which if the account receivable/payable on the last date do not give a representative level of working capital for the whole year, average may be used if it reflects the better level of working capital over the year. In our view, working capital adjustments are required to be made because these do imp ac t the profitability of the comp any. Rule 10B (2)( d) al so provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if independent comparables undertake some risk, the assessee also had to undertake risks like single customer risk, political risk, etc which are not incurred by the comparable companies and hence the risks are evened out. * The independent entrepreneur has to incur expenditure on marketing, etc. which is debited to the profit and loss account. But, it is always not necessary that these risks reflected in the marketing, sales promotion expenses will automatically be compensated by Increase in sales or higher margins. For example, increased marketing efforts in some segments of export market may not yield results for an IT enabled service company and thereby there may be a loss on this marketing effort which may bring down the overall profitability rather than increase the profitability. Thus if undertaking the market risk etc. helps in earning any extra margin, the benefit is more than set off by the corresponding expenditure. The same applies to credit risk undertaken. * There are many studies conducted on the risk reduction strategies followed by MNCs by shifting their production facilities to other countries based mainly on cost factors. By outsourcing to India, the ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able.- Symantec Software Solutions Pvt Ltd(2011-TII-60-ITAT-Mum-TP) iii. There are several factors such as market risks, which affect the results of the company. These factors make it impracticable to find out exact duplicate of the assessee as comparable. Some variation is bound to exist. The TPO had identified comparables whose functions were similar to the assessee by applying quantitative and qualitative filters to eliminate differences between the assessee and the comparable to neutralize the risk factors. The assessee's argument that it is a "Iow end performer" operating in "risk-free environment" and that suitable adjustment should be made is not acceptable;- DCIT vs. Deloitte Consulting India Pvt. limited (ITAT Hyderabad) 18.12 Taking all these facts entirely into account, the assessee is not entitled for any risk adjustment." 46. On objection of the Assessee on the above conclusion of the TPO in his order, the DRP upheld the action of the TPO, for the following reasons: "Decision: 11.2. The claim of the Assessee for risk adjustment has been considered. While as per the Rules, adjustment should be provided for each function and difference of the risk identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove the assessee has also highlighted several other risk factors. In the decisions cited by the ld. Counsel for the assessee, Tribunal has taken the view adjustment towards the risk factors should be given. We are of the view that it would be just and appropriate to set aside the order of the DRP on this issue and remand the question of allowing risk adjustment to the AO for fresh consideration. This ground no.16 is thus treated as allowed for statistical purposes. 50. As far as grounds of appeal raised by the revenue are concerned while dealing with the grounds of appeal of the assessee we have already held that foreign exchange loss or gain will be considered as part of the operating profits of the assessee. If they relate to and arise out of the business of the assessee and in particular the transactions in relation to which the arms length price is determined. In the present case the assessee is a captive service provider and software development is the only activity of the assessee and therefore income arising out of foreign exchange gain or loss has to be regarded as part of the operating income of the assessee. 51. As far as ground no.2 raised by the revenue is concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und fault with this calculation made by the assessee. The provision of Rule 8D(1) as also the provision of section 14A(2) of the Act mandate disallowance in accordance with Rule 8D(2) of the Rules, only where having regard to the accounts of the assessee, the AO is not satisfied with the correctness of the claim of the assessee regarding expenditure incurred to earn tax free income. In the absence of any reason in given for rejecting the claim of the assessee, we hold that disallowance u/s 14A of the Act should be restricted only to the sum of Rs. 1,12,895/- as disallowed by the assessee in its computation. Thus ground no. 17 raised by the assessee is allowed. 56. Ground No.18 raised by the assessee reads as follows :- " 18. For that the Assessing Officer erred in adding back depreciation of Rs. 42,58,767 as per the Appellant's books of account and in granting deduction of depreciation as per Rules of Rs. 34,05,607/-." 57. As far as ground no.18 raised by the assessee is concerned, while computing the book profits u/s 115JB of the Act, the AO is not empowered to make any adjustment which is not permitted by the explanation below section 115JB of the Act. The depreciation to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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