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TMI Blog2016 (1) TMI 1436X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was from the billings on its AE abroad for the services rendered by it. Nothing has been brought on record to show that any of the foreign exchange loss / gain had come from any hedging activity or any other line of activity undertaken by the assessee. Unless rebutted a safe presumption can be made that foreign exchange loss / gain arose out of the business activity of the assessee which was entirely providing ITES services to its principal abroad. We cannot say that foreign exchange loss / gain had no nexus with such activity. We are therefore of the view that the DRP took a correct view on this issue. DRP had accepted the submission of the assessee that such gains / losses were closely linked to its business operation did and not relate to any extra ordinary or abnormal events. Grounds 3 and 4 stand dismissed. Grant of risk adjustment without advising a reasonably accurate method for its determination - Assessee in its TP study had not made any adjustment for risk while calculating of PLI - HELD THAT:- Assessee itself had never made any attempt in its TP study to quantify the risk. On the other hand, assessee itself had mentioned the difficulties of attempting a risk adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income from the business income - AR submitted that when rental income was excluded while calculating the PLI of the assessee, corresponding rental expenditure was also required to be excluded - HELD THAT:- AO in the assessment done pursuant to the DRP directions had excluded rental income from the business income. As per the assessee it had incurred expenditure of 23,75,000/- which is relatable to the earning of rental income. We are of the opinion that once rental income is excluded from the business income of the assessee while calculating the PLI of the assessee, as a natural corrolary expenditure incurred for earning such rental income is also required to be excluded. We therefore set aside the orders of authorities below and direct the AO / TPO to rework the PLI by excluding both rental income and the expenditure relatable to the rental income after proper verification. Ground 7(h) of the assessee is treated as allowed for statistical purpose. Working capital adjustment though directed by the TPO to be given in the order passed u/s.92CA - HELD THAT:- It is clear that AO had omitted to give the working capital adjustment. We therefore direct the AO to give working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer by applying the same principles as emerging from the orders of ITAT in the case of Sap Labs India Pvt. Ltd. 5 Whether the Id, DRP is justified in directing the TPO to grant risk adjustment without advising any reasonable accurate method in the absence of which the TPC had not provided the same. 03. Grounds 1 and 2 assails exclusion of M/s. E-clerk Services Ltd and Infosys BPO Ltd, from the list of comparables selected by the TPO, for bench marking the pricing of the international transactions of the assessee with the Associated Enterprise ('AE' in short). TPO had applied turnover filter of ₹ 200 crores. 04. Facts apropos are that assessee providing data analysis services to its principal in USA called M/s. Zyme Solutions Inc, had filed its return for the impugned assessment year declaring loss of ₹ 5,84,039/-. Assessee had claimed deduction of ₹ 1,63,75,996/- u/s.10A of the Act. Since it had international transactions with its associated enterprise ('AE' in short) in USA, along with its return of income assessee had also filed TP study and audit report in form 3CEB as per IT Rules. In the TP documentation prepared by the assessee and submitted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmendation made by him u/s.92CA is as under : Arm's Length Mean Margin on cost 26.86% Less: Working Capital Adjustment 0.23% (As per Annex. C) Adjusted margin 26.63% Operating Cost 15,48,06,930 Arms Length Price (ALP) 19,60,32,015 126.63% of Operating Cost) Price Received 16,64,84,587 Shortfall being Adjustment u/s 92CA: 2,95,47,428 Operating cost considered by the TPO was excluding donations and loss in current investments. 08. When the AO issued a draft assessment order proposing an upward adjustment of ₹ 2,95,47,428/- as recommended by the TPO, assessee chose to move the DRP. 09. Though various contentions were taken by the assessee before the DRP for exclusion of Accentia Technologies Ltd, Acropetal Technologies Ltd (seg), Eclerx services Ltd, ICRA Online Ltd (Seg) and Infosys BPO, DRP directed exclusion of only two companies, viz., Eclerx Services Ltd, and Infosys BPO Ltd. DRP directed exclusion of these two companies applying turnover filter of 200 crores. Since turnover of the assessee was only ₹ 16.65 crores, as per the DRP the above two companies could not be considered as proper comparables since these had significantly higher turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reunder : "5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows (1) HCL Comnet Systems & Services Ltd :- We find force in the submission of the Id. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turnover is around ₹ 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of ₹ 11 crores cannot be compared with a company which is having turnover of ₹ 260 crores which is more than 23 t imes the turnover of the Assessee. This company cannot be regarded to be in equal size to the Asseessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is ₹ 649.56 crores while the turnover of the Asseessee company is around ₹ 11 crores which is much more than 65 times of the Assessee's turnover. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores at the higher end while choosing the comparables. He submitted that this adoption of upper limit of ₹ 200 Crores is based on the Dun and Bradstreet's analysis which has classified the software companies into the following categories; 1. Large size firms (₹ 20,000 Mn) 2. Medium size firms (₹ 2,000-20,000 Mn) 3. Small size firms (₹ 2,000 Mn) 7.1 The learned counsel for the assessee submitted that the T PO has rejected the upper limit of ₹ 200 Crores on the ground that there is no relationship between sales and margins in the service sector as fixed assets are very minimal. He submitted that this is not correct because, the size of the comparable is an important factor of comparability and that it is also recognized by the statute, especially the Rules. He 1. Dy. CIT v. Quark Systems (P.) Ltd., [2010] 38 SOT 307 (Chd.) (SB), wherein it was held that even the filter of lower turnover of ₹ 1.00 crore is without any reasonable basis and there is no filter for higher turnover also. The application of turnover filter also leaves much to be desired and has to no rationale basis. In our considered view, it is improper to proceed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not affect the profit ratio in any way. He drew our attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 14. We are therefore of the opinion that DRP was justified in directing exclusion of companies having turnover in excess of ₹ 200 crores. Grounds 1 and 2 of the Revenue stand dismissed. 15. Vide its ground 3 and 4, grievance raised by the Revenue is that foreign exchange loss/ gain was considered to be operating in nature by the DRP though such loss / gain was not attributable to the operating activity of the assessee. 16. Ld. DR submitted that DRP had relied on the decision of coordinate bench in the case of Saplabs India Pvt. Ltd v. ACIT [(2010) 6 DTR 0081]. According to her, Mumbai bench of the Tribunal in the case of DHL Express India P. Ltd v. ACIT [(2011) 11 Taxman.com 40] had taken a contrary view. 16. Per contra, Ld. AR supported the directions of the DRP. 17. We have perused the orders and heard the rival contentions. Ground taken by the Revenue is that foreign exchange loss / gain was not attributable to the operating activity of the assessee. Sole business revenue of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is any difference, for a moment academically speaking, it rests in the realm of quality and not quantity. There is no reliable method to convert the qualitative difference into quantitative difference and to make adjustment on account of risk level. As per the provisions of Rule 10B(3), if any adjustment should be made, it should be reasonably accurate to eliminate the material effects of such differences. But in case of risk adjustment, neither reasonably accurate adjustment can be made for want of method to do so nor has it been established that there is a material effect that is affecting the comparisons due to risk level. If the taxpayer is suggesting that there exists a difference in the risk level assumed by the tested party and uncontrolled comparables, it is academic in nature and not based on any study whose results has been validated. It is not out of place to reiterate that single customer risk is a huge risk which the uncontrolled comparables are not assuming. By having more customers, the risk is shared or spread. In other words, if one customer goes out of business still there are others which will sustain the business of the tested party. But in case of the taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to consider all the contentions and decide the percentage of risk adjustments to be made in accordance with law, In the case of Bearing Point Business Consulting Pvt. Ltd vs DCIT (ITA no. 1124/Bang/2011) this decision was once again followed by the jurisdictional ITAT. 7.8.4 After consideration of the various facets of this matter, and respectfully following the decision of the Hon'ble ITAT Bangalore as above, the TPO is directed to decide the percentage of risk adjustments to be calculated in this case. By means of guidance, it may be mentioned that in the case of DCIT v. Hello Soft Pvt. Ltd (2013) 32 taxmann.com 101 (ITAT, Hyd) 1% adjustment to the average margin was provided towards risk differential. 21. Now before us, Ld. DR submits that the DRP had effectively directed 1% adjustment for risk without any basis. According to her, DRP had not given any specific method that was to be followed for calculating the risk. 22. Per contra, Ld. AR supporting the DRP' s directions submitted that DRP had given clear guidance to the TPO by referring to decision of Hyderabad Bench of the Tribunal in the case of Hello Soft Pvt. Ltd (supra). 23. We have perused the orders and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee also clearly showed that it was providing ITE services. Further as per the Ld. AR Asscent Infoserve Ltd, had amalgamated with Accentia Technologies and due to such amalgamation, latter could no longer be considered as an ITES provider. 26. Per contra the Ld. DR submitted that the objections of the assessee with regard to the nature of activity of Accentia Technologies Ltd, was duly considered by the lower authorities and was found to be incorrect. 27. We have perused the orders and heard the rival contentions. What was held by this Tribunal in the case of Rampgreen Solutions P. Ltd (supra) is reproduced here under : 16. As regards Accentia Technologies Ltd., ld. counsel referred to pages 350 & 351 of the PB-II, wherein the annual report of this company is contained. He pointed out that in the year under consideration Asscent Infoserve Ltd. amalgamated with this company w.e.f. 1-4-2008. He pointed out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accentia Technologies Ltd. in serving the end to end results. Thus, functionally amalgamating company and amalgamated companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this company has been excluded and, accordingly, in the present case also this should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of Techbook International Pvt. Ltd. (supra), has observed as under: "Succinctly, the assessee was incorporated as a wholly owned subsidiary of Aptarausa. It is engaged in the development of customized electronic data. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy/ electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd heard the rival contentions. Argument of the assessee is that Acropetal Technologies Ltd (seg) was predominantly doing EDS which was of a high-end and not the type of services that was being done by the assessee. Observations of Hyderabad bench of the Tribunal in the case of Capital IQ Information Systems (India) P. Ltd (supra) which was for A. Y. 2009-10, relied on by the Ld. AR is reproduced hereunder : (5) Acropetal Technologies Ltd. (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y skilled function, requiring advanced programming skills and knowledge of data mining. Data analytics is no ordinary job like daily business accounting or book-keeping. It is in no way comparable to a low end business process outsourcing function. Accordingly, we are of the opinion that Acropetal Technologies Ltd (seg), cannot be excluded from the list of comparables. Ordered accordingly. 33. Continuing his arguments seeking exclusion, Ld. AR submitted that ICRA Online Ltd, though it was one of the two comparables which formed a part of assessee's own TP study, it had to be excluded since its export sales were below 75%, of its total revenues. Ld.AR submitted that the TPO had in its TP study for A. Y. 2012-13 accepted export sales filter of 75% on sales. Reliance was also placed on the decision of Mumbai bench decision in the case of Vodafone India Services P. Ltd v. ACIT [ITA.7514/Mum/2013, dt.10.12.2014]. 34. Per contra Ld. DR submitted that I C R A was a part of assessee's study and assessee could not turn around and say that it should be excluded. 35. Ad libitum reply of the Ld. AR was that assessee could raise such a pleading considering the decision of Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs to sales could be applied, decision of Mumbai Bench in the case Vodafone of India Services P. Ltd (supra) is very relevant, which is as under : The assessee is a captive service provide of call centre to its AE, therefore, the entire revenue of the assessee's call centre comes from the export. Accordingly, the filter of minimum 75% export earning applied by TPO was logical and reasonable and it is not going to effect the interest of any party as is applicable for all the comparables whether it was selected by the TPO or by the assessee. 39. Nevertheless, we are of the opinion that the question whether the foreign exchange earnings of ICRA was above or below the limit of 75% was not verified by any of the lower authorities. We are therefore of the opinion that the issue regarding comparability of ICRA Online Ltd, requires a fresh look by the AO / TPO. We set aside this issue back to the file of AO / TPO for consideration afresh so that he can correctly calculate the export sales ratio of the said company to its total revenues for applying the 75% filter. Grounds 7(c)( 7(d) and 7(e) are treated as partly allowed. 40. In support of his ground 7(h) Ld. AR submitted that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is restricted to 0.23%. 42. It is clear that TPO had accepted a working capital adjustment of .25%. Nevertheless the AO when he passed the final assessment order pursuant to the directions of the DRP calculated the ALP of ITES as under : Arm's Length Mean Margin on cost 22.067% Less: Risk Adjustment 1.00% Adjusted margin 21.67% Operating Cost 154,806,930 Arm's Length Price (ALP) 188,353,691 121.67% of Operating Cost) Price Received 166,532,972 Shortfall being Adjustment u/s 92CA: 21,820,618 43. It is clear that AO had omitted to give the working capital adjustment. We therefore direct the AO to give working capital adjustment of 0.23% as recommended by the TPO. Accordingly ground 7(i) of the assessee stands allowed. 44. Now we take up corporate tax grounds raised by the assessee. Grievance of the assessee is that AO while considering its rental income under the head 'income from other sources' had not reduced the expenditure relatable to such rental income. 45. We have heard the rival counsels. Case of the assessee is that for earning the rental income it had incurred expenditure of ₹ 23,75,000/. Assessee had by itself reduced the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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