TMI Blog2013 (2) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned DRP on the inclusion of ICRA Online in the comparable list. Exchange fluctuation gain - Capital Receipt or Revenue Receipt? - Assessee had raised external borrowings i.e. ECB loan. On account of fluctuation gain, it received a some amount. The assessee contended that it is a capital receipt, whereas according to the learned AO it is a revenue receipt. - HELD THAT:- Loan was utilized not for the purpose of purchasing capital assets but for other purposes also. If a loss suffered on account of foreign exchange fluctuation is allowable as a revenue expenditure, as per the decision of the Hon'ble Supreme Court in the case of CIT VERSUS M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. [ 2009 (4) TMI 4 - SUPREME COURT] , then the gain on such fluctuation would also be revenue receipt. Thus treated as revenue receipt. Decision against assesee. - ITA No. 4661/Del/2011 - - - Dated:- 22-2-2013 - Rajpal Yadav (Judicial Member) And T. S. Kapoor (Accountant Member) For the Petitioner : Manoneet Dalal For the Respondent : Peyush Jain ORDER Rajpal Yadav (Judicial Member) 1. The present appeal is directed at the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xisting products and new products. Learned TPO noted six international transactions entered by the assessee with its AE. Learned TPO in his order has recommended adjustments in the ALP of two international transactions, namely, (A) provision of software design, development, testing services, provisions of CDNA chipset designing and development services; and (b) provisions of business software services. 4/5. On the recommendations of the learned TPO, learned AO has proposed adjustments in the draft assessment order. Against the draft assessment order, assessee has filed objections before the learned DRP. Learned DRP has directed the AO to grant working capital adjustment. While granting the working capital adjustment in software segment, learned AO found that no adjustments are required to be made in the provisions of software service and chipset designing and development services. Thus, the adjustment has been made in the ALP of the provisions of business support services. Therefore, we need not to go into the details with regard to other international transactions which have been discussed by the learned TPO and learned DRP in their orders. The dispute confined in these grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs have been derived from consultancy to foreign banks. Only the results of management consultancy fee segment have been considered for the purpose of comparison. The financial data of the company has been examined. It is seen that the turnover of the company in the relevant segment for the year ending March, 2007 is ₹ 25.65 lakhs. A company with meager revenue of ₹ 25 lakhs cannot be compared to the tested party whose revenue from business support services is more than ₹ 33 crores. This company is liable to be rejected on this ground. I therefore, propose to reject this company as a comparable. (ii) Crisil Ltd.The annual report of the company has been examined. It is seen that the company has a financial year ending on 31st Dec., 2006. Moreover there are related party transactions of more than 25 per cent. This company is liable to be rejected. I therefore propose to reject this company. (iii) TSR Darashaiw Ltd. The assessee has stated that this company is not comparable. 4.4 After rejecting the above companies following comparative are left as comparables:- Sl. No. Name of the company OP / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned DRP has allowed partial relief to the assessee on account of working capital adjustment. As observed earlier, on the basis of directions of the DRP, the adjustments recommended by the learned TPO in software segment were not sustainable: The only one issue remained adjudication in the present appeal is with regard to determination of ALP in business support segment. After the directions of the DRP, the addition recomputed by the TPO at ₹ 2,59,19,902. The working made by the learned AO in the final assessment order is as under:- The computation of adjustment amount based on the above arm's length margin is as follow:- Particulars Amount Operating cost 30,51,67,951 Arm's length OP/TC 16.88% ALP 35,66,80,301 Book value of revenue 33,07,60,399 Difference 2,59,19,902 % of difference with value of international transaction 7.83% 11. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d added substantial number of new clients during financial year 2006-07 whose services would be rendered in subsequent period. Therefore, the expenses in subsequent years would be on the higher side; The profit @ 63.33 per cent is more than four times of the upper range of operating margin of other comparables. Thus, the single year data should not be used with regard to this company. 12. Learned Departmental Representative on the other hand submitted that accounting policy of ICRA Online is no way affecting any single year of the operating margin. He drew our attention towards page No. 178 of the annual report and pointed out that in the subsequent year, similar revenue reorganization policy was there. 173 new clients were added in the next year but still there is a reduction in the operating margin. Therefore, there is no abnormality in the operating margin. 13. We have duly considered the rival contentions and gone through the record carefully. Rule 10B(4) of the IT Rules has a direct bearing on the controversy. Therefore, it is salutary upon us to take note of this rule; it reads as under:- 10B(4). The data to be used in analysing the comparability of an uncontrolled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin per se cannot be such an exception. There is no change either in the accounting policy or in the profile of ICRA Online. Under the similar accounting policy and in spite of addition of more number of new clients (161 in financial year 2006-07 and 173 in financial year 2007-08), the operating margin of ICRA Online reduced to 27.46 per cent.' Thus, it suggests that this accounting policy and recognition of revenue at 60 per cent in the year of contract and 40 per cent during the period of contract are in no way influencing the result. More so, prima facie, the figures brought to our notice does not suggest any interconnection between number of years though fluctuation in profit is there, but how the result of one year is affecting the result of other year has not specifically been substantiated and in the absence of concrete material, it is difficult to accept the arguments of the assessee merely for the sake of argument. The other argument raised by the assessee is that ICRA Online has shown super profit and therefore it is not comparable. We find that learned DRP has made reference to the revised guidelines of the OECD in para No. 71 as well as the decision of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the comparable lists. There cannot be any error to such exclusion. 18. In the next fold of submissions, learned counsel for the assessee pointed out that risk adjustment has not been provided to the assessee. The learned counsel for the assessee submitted that r. 10B(1)(e)(iii) provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the difference in function and risk in the open market, in theory, the assumption of increased risk is normally compensated by an increase in the expected return. He pointed out that controlled and uncontrolled transactions are comparables only when adjustment with respect to significant difference between them in the risk assumed is made. The assessee is a captive operator. Therefore, the margins earned are comparatively lower to reflect the lower level functions and risk. He further pointed out that learned TPO as well as DRP has observed that the assessee always runs a risk of single customer because it is a captive operator operating for its AE. If the AE does not provide work to the assessee then it will not be able to operate. He pointed out that such a single customer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e service provider to its AE, therefore, it is a risk-free entity. According to the learned counsel for the assessee, the basic economic formula is, take more risk, more profit would be there. Thus, an adjustment on assuming risk be given. In other words, the emphasis of the assessee is that if there is no risk then resultant profit would also be on the lower side. Learned TPO has made a lucid analysis of the facts and law on this issue. He basically assigned three reasons for not concurring with the assessee. In the first reason, learned TPO has pointed out that assessee is in a business which requires skilled manpower. Skilled manpower is the human capital related intangible assets. Referring to the judgment of Appellate Tax Court, USA in the case of Ithaca Industries Inc. vs. CIR 97 TC 253, he observed that in a knowledge organization, there is a little machinery other than the employees, because only people can act, employees become both the minders of the machines and machines themselves. Therefore, it is always difficult to retain skilled work force, because with the globalization of trade, many new opportunities are available to skilled staff. The assessee has developed its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation if it is terminated without any cause. The AE is exposed to the market risk and any fluctuation in the business conditions of the AE affect the taxpayer. Thus, even if independent comparables undertake some risk, the taxpayer also had to undertake risks. The independent entrepreneur has to incur expenditure on marketing, etc. which is debited to the PandL a/c. 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 a software development 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. It is incorrect to say that higher the risk, the higher is the margin though it is true that higher risk expects a higher margin. Thus realization of risk is different fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk rates and prime lending rates depend on various factors including the monetary policy of the Government, rate of inflation, exchange rate management of RBI, FDI inflows, exports, imports, fiscal deficit of Central Government, the rates on the short-term deposits with the banks, the credit spread decided by the banks the conditions in the financial markets and the liquidity in the market. Nowhere, these rates are linked with risk return of any business. Most importantly, the above difference includes the profit of the bank associated with its own functions, assets, and risks which is different from that of the taxpayer. So, the so called difference in the interest rate is not only attributable to the risk but also the cost involved in running banking operation. Thus, the computation of risk adjustment by the taxpayer is vague and without any basis as it has nothing to do with the software sector as well as comparable companies selected by the TPO. 30. In view of the above discussion, it is held that no risk adjustment is to be given to the taxpayer. 24. On due consideration of all these aspects, we are of the view that learned Revenue authorities have considered all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval of RBI for raising ECB loan was in respect of Bangalore Unit only. Thus, the loan was not meant only for acquiring of capital goods. The question whether exchange fluctuation gain is revenue or capital receipt is related to the utilization of the amount at the relevant time and not with the object for which the loan had been obtained. Learned DRP has specifically recorded that loan was utilized not for the purpose of purchasing capital assets but for other purposes also. If a loss suffered on account of foreign exchange fluctuation is allowable as a revenue expenditure, as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India (P) Ltd. (2009) 223 CTR (SC) 1 : (2009) 21 DTR (SC) 106 : (2009) 312 ITR 254 (SC), then the gain on such fluctuation would also be revenue receipt. Therefore, there is no error at the end of the learned AO in treating the gain as a revenue receipt. 27. As far as the alternative contention is concerned, we do not find any merit in it, because the gain is not derived from the business of exports of computer software. It might be attributable to the business of export of computer software but it does not qualify ..... X X X X Extracts X X X X X X X X Extracts X X X X
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