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TMI Blog2017 (6) TMI 1315X X X X Extracts X X X X X X X X Extracts X X X X ..... d factual matrix of the case, as discussed above, we find no reason/requirement to interfere with or deviate from the finding rendered by the DRP on this issue and, therefore, uphold the same. - Decided against revenue Risk adjustment - DRP order in granting the assessee 1% risk adjustment arbitrarily and on an ad hoc basis - HELD THAT:- While the co-ordinate benches of this Tribunal in specific cases have been directing the TPO to grant the assessee risk adjustment, if warranted, based on examination of the working submitted by the assessee; in this case however we find that the DRP has allowed ad hoc risk adjustment of 1%, without any examination of the assessee's working of risk, the facts of the case or assigning reasons for its finding. In these factual circumstances, we are of the opinion that the decision of the DRP in granting the assessee an ad hoc 1% risk adjustment is baseless and bereft of any examination of the assessee's working of risk, if any, the facts of the assessee's, case vis a vis the comparable companies etc. We, therefore, set aside the order of the DRP granting the assessee ad hoc risk adjustment of 1%. Consequently, ground of Revenue's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2 Aggrieved by the draft order of assessment dated 26.03.2015 for Assessment Year 2011-12, the assessee filed its objections thereto before the DRP-2, Bangalore. The DRP issued its directions u/s. 144C(5) of the Act vide order dated 04.12.2015. (i) allowing the assessee's relief in respect of its claim for deduction u/s. 10A of the Act and (ii) and reducing the TP adjustment to ₹ 4,35,28,671/-. The final order of assessment was framed u/s. 143(3) r.w.s. 144C(13) of the Act vide order dated 18.01.2016 in pursuance of the directions of the DRP. 2.3 Both Revenue and the assessee, being aggrieved by the final order of assessment dated 18.01.2016 for Assessment Year 2011-12, have filed cross appeals before the Tribunal. These appeals are being disposed off in seriatum hereunder: Revenue's appeal in IT(TP) A No. 384/Bang/2016 for Assessment Year 2011-12 3. In this appeal, the revenue has raised the following grounds:- 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. The Hon'ble DRP erred, in directing the AO to reduced the expenses both from Export Turnover as well as Total Turnover when there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding rendered by the DRP on this issue and, therefore, uphold the same. Consequently, finding no merit in the grounds, No: 2 raised by Revenue (supra) we dismiss the same. 5. Ground No: 3 - Risk adjustment 5.1 In this ground, the Revenue assails the DRP order in granting the assessee 1% risk adjustment arbitrarily and on an ad hoc basis without appreciating the facts of the case and its comparables. 5.2 We have heard both parties in the matter and perused the DRP's order. The ld. AR for the assessee submitted that the assessee is not objecting or challenging this ground raised by Revenue for reversing the ad hoc risk adjustment of 1% granted by the DRP to the assessee in its order. We also observe that while the co-ordinate benches of this Tribunal in specific cases have been directing the TPO to grant the assessee risk adjustment, if warranted, based on examination of the working submitted by the assessee; in this case however we find that the DRP has allowed ad hoc risk adjustment of 1%, without any examination of the assessee's working of risk, the facts of the case or assigning reasons for its finding. In these factual circumstances, we are of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act which were not satisfied in the impugned case. Further, the learned AO/TPO and the Honorable DRP did not consider the requirement of Rule 10D(4) of the Rules when undertaking a fresh search of comparable companies. Filters and qualitative criteria and the Companies selected for determining ALP 5. The learned AO/TPO and the Honorable DRP have erred in law and on facts in determining the arm's length price by adopting the financial data for a single year (i.e. the financial year 2010-11) of the comparables as against multiple year data considered by the Appellant. 6. The learned AO/TPO erred in law and on facts in modifying the filters applied by Appellant as well as by applying the additional filters for conducting TP analysis, without cogent reasons and appreciating the TP documentation prepared by the Appellant. 7. The learned AO/TPO and the Honorable DRP have erred in determining the ALP for the appellant's international transactions by selecting companies by way of a fresh search which are not comparable to the Appellant due to various factors such as functional differences, lack of segmental information, significant onsite revenue, product led revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table criteria for comparability: LGS Global Limited Thinksoft Global Services Limited CG-VAK Software Exports Limited 15. The Ld. TPO erred in rejecting FCS Software Solutions Limited as a comparable to the Appellant merely on the ground of higher working capital adjustment, despite himself proposing the comparable initially in the show cause notice as having qualified all the filters applied by the Ld. TPO. The Ld. TPO has erred in law in not appreciating that working capital adjustment is relevant while determining arm's length price and cannot be taken as a criteria for rejection or selection of the comparable company. . 8.2.2 In the application for admission of the aforesaid additional grounds 13 to 15 (supra) it is, inter alia, submitted that the assessee had argued before the authorities below for exclusion of the following two companies on grounds of their being functionally different to the assessee or fails to meet the legally acceptable criteria for comparability; (i) Acropetal Technologies Ltd. and (ii) E-Infochips Limited. Similarly additional grounds are also raised for inclusion of following four comparables which the assessee claims ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies having mean margin of 12.84% in comparison to the assessee's profit margin of 11.98%. In these circumstances, the assessee claimed its international transactions are at arm's length. The TPO rejected the assessee's TP study and after carrying out a fresh search, selected a final list of 13 comparable companies with an average mean margin of 24.82%. In these circumstances, the TPO after allowing working capital adjustment, proposed a TP adjustment u/s. 92CA of the Act of ₹ 4,64,76,292/- in respect of the ALP of international transactions entered into by the assessee in this year in respect of software development services. The IPO's list of comparables is as under:- Sl.No. Name PLI 1 Acropetal Technologies Ltd. (seg) 31.98% 2 e zest solutions (from Capitaline) 21.03% 3 E-infochips Ltd. 56.44% 4 Evoke (from Capitaline) 8.11% 5 ICRA Techno Analytics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D activities and owns its own intangibles. In support of its plea for exclusion of this company from the list of comparables,. 'reliance was, inter alia, placed on the decision of the co-ordinate bench in the case of GT Nexus Software (P.) Ltd. v. Dy. CIT [IT (TP) Appeal Nos. 31 409 (Bang) of 2016, dated 18-4-2017]. 14.2 Per contra, the ld. DR for Revenue supported the orders of the authorities below in including this company in the final list of comparables. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from Information Technology Services is ₹ 81.40 crores out of total income of ₹ 141.65 crores. Therefore, it is amply clear that the income from Information Technology Services is less than 75% of total revenues and consequently this company does not satisfy the filter of information technology services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration i.e. Assessment Year 2011- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. (supra) at para 12 thereof has held as under:- '12. The functional comparability of this company has been considered by the Delhi Bench of the Tribunal in the case of Saxo India Pvt Ltd. v. ACIT (supra) in paras 10.1 to 10.2 as under: (i) E-infochips Limited: 10.1. The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development hardware maintenance, information technology, consultancy etc. Revenue fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable in its TP study. The TPO rejected this company as a comparable on the ground that it is functionally different and is not into provision of software development services, as the annual report indicates that it is into software validation and verification services and further it would not have incurred expenditure on sales commission if it was into provision of software development services. It was also rejected on grounds of failing the ForEx filter. According to the ld. AR for the assessee, this company is engaged in provision of software development services to the banking and financial services and is therefore functionally comparable to the assessee. It is further submitted that the assessee passes the forex filter being at 91.21% of sale. It is also contended that in immediately preceding year i.e. Assessment Year 2010-11; the TPO has accepted this company and included this in the final set of comparables. 17.2 Per contra, the ld. DR for revenue supported the orders of the authorities below in excluding this company from the final set of comparables. 17.3 We have heard the rival contentions and perused and carefully considered the material on record. On a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 was considered by a co-ordinate bench in the case of Informatica Business (P.) Ltd. and its order in [IT Appeal Nos. 1285 1294 (Bang.) of 2014, dated 17-3-2017] the Tribunal had directed the TPO/AO to include this company as a comparable to the assessee who is a provider of software development services. It is prayed that this company be included in the final set of comparables. 18.2 Per contra, the ld. DR for revenue supported the orders of the authorities below in rejecting this company as a comparable to the assessee. 18.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. It is seen from a careful appreciation of the material on record that this company i.e. FCS Software Solutions Ltd., though into providing software development services, as is the assessee in the case on hand, was rejected by the TPO on the ground of its working capital adjustment being high, it would affect the profit margin and hence rendered as not comparable to the assessee in the case on hand. We find that similar case of rejection of this company as a comparable on grounds of high working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the co-ordinate bench in the case of Moog Controls (India) (P.) Ltd. v. Dy. CIT [IT(TP) Appeal No. 551(Bang.) of 2015, dated 27-11-2015]. 19.2 Per contra, the ld. DR for revenue supported the orders of the authorities below on this issue. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On the appreciation of the facts on record on this issue, it is seen that the TPO has restricted the working capital adjustment to 1.63%. According to the assessee such a restriction is not justified as the adjustment seeks to remove the differences in working capital position between the assessee and the comparable companies. We find that this issue of restriction of working capital adjustment was considered by a co-ordinate bench of this Tribunal in the case of Moog Controls (India) (P.) Ltd. (supra) and the co-ordinate bench directed the AO/TPO to allow actual adjustments towards the differences in working capital position between the assessee and the companies selected as comparables. At paras 24 to 29 thereof, the co-ordinate bench held as under:- '24. The next contention of the assessee is that the working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ored the above principles of comparability and contested that the transfer price of uncontrolled independent companies have component of return for functions and return for working capital, it was submitted that though the assessee is not denying this fact, but the return for working capital position between the assessee and the companies selected as comparable vary due to their characterisation and there exists a methodology which is also well accepted Internationally to nullify these differences. Therefore, it was submitted that such an adjustment should be carried out to bring in appropriate comparability between the tested party and the companies selected as comparable without any upper cap, which is not based on any sound rationale. The ld. counsel for the assessee relied on the decision of the Mumbai Bench of the Tribunal in the case of Dresser-Rand India Pvt. Ltd. v. ACIT (ITA No. 8753/Mum/2010) has held that The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order. The Mumbai Bench in the above case has referred to the observations made by Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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