TMI Blog2017 (11) TMI 1360X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1,12,895/- as disallowed by the assessee in its computation. - Decided in favour of assessee. MAT computation - adding back depreciation as per the Appellant’s books of account and in granting deduction of depreciation as per Rules - Held that:- 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 allowed while working the book profits is always as per the Companies Act and the depreciation should not be reduced as is done in the normal assessments by substituting the depreciation claimed under the Companies Act by the depreciation allowable under the Act. The action of the AO is per se unsustainable and the AO is directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities below erred in including E-Infochips Bangalore Limited and lnteq Software Limited in the [mal set of comparables although they are secret comparables for which no data was otherwise available, they are not functionally comparable and also have supernormal operating margin. 7. For that the Authorities below erred in including Infinite Data Systems Pvt. Ltd. (Merged) in the final set of comparable although it is not functionally comparable and has a supernormal operating margin. 8. For that the Authorities below erred in including (a) Thirdware Solutions Limited and (b) Comp-U-Learn Tech India Ltd in the final set of comparables although they are not functionally comparable. 9. For that the Authorities below erred in selecting Kuliza Technologies Private Ltd in the final set of comparables, a secret comparable for which no data is otherwise available and in any event in considering the bad debt of the said company as a non-operating expense for the purpose of computing operating margin. 10. For that the Authorities below erred in excluding CG- V AK Software Exports Limited from the set of corn parables by erroneously considering it as a consistent l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The aforesaid grounds of appeal are with reference to the determination of Arms Length Price (ALP) in respect of an international taxation between the assessee and its Associated Enterprises (AE). The Assessee is a company. It is engaged in the business of rendering software development services. The Assessee renders services to Anshin Software Corporation, USA incorporated as a company under the laws of California, USA. In fact the assessee is a captive service for Anshin Software Corporation, USA. It is not in dispute that the assessee and Anshin Software Corporation, USA are associated enterprises because of common share holding in both the companies by Shri Arnab Debnath and Miss Mausumi .Debnath. The assessee received a sum of ₹ 13,37,18,400/- for rendering software development services to Anshin Software Corporation, USA. Under the provision of section 92 of the Act, any income arising out of an international taxation has to be computed having regard to the Arms length price. Under section 92F(ii) of the Act Arms Length Price means a price which would be charged between persons if they are not associated enterprises and there are no uncontrolled conditions prevail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that multiple year data cannot be used for comparison purpose and it was only the data of the relevant previous year that has to be used in arriving at the arithmetic mean of profit margin of the comparable companies. The TPO thereafter rejected 20 out of 21 companies chosen by the assessee i.e., except the company Global services Ltd., chosen by the Assessee in its Transfer Pricing Analysis, all other companies chosen as comparable companies by the Assessee were rejected as not comparable with the business profile of the assessee. The TPO on his own identified eight more companies as comparable companies of the assessee and arrived at the operating profit to operating cost of these companies and determined the arms length price of the international taxation as follows :- (Quote from AO s order) 19. The list of final comparables selected by the TPO, along with the margins is as follows : Sr. NO. Name of the company OP/TC 1 Spry Resources India Pvt. Ltd. 33.25% 2 Kuliza Technologies Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it/operating cost of the comparables. In respect of the foresaid two directions of the DRP, which was incorporated by the AO in the impugned order, the revenue is in appeal before the Tribunal in its appeal. Aggrieved by the action of the DRP in not rejecting the comparables chosen by the TPO and also excluding some of the comparables chosen by the assessee in its TP analysis and not allowing the working capital adjustment and other risk adjustment and not excluding interest income while computing the operating profit/operating cost of comparables vz., Kuliza Technologies Ltd. And Inteq Sofware Pvt. Ltd., the assessee has raised grounds no.1 to 16 before the Tribunal. We will deal with all the grounds in seriatim in the following paragraphs. 8. As far as Ground No.1(a) raised by the assessee in its appeal is concerned, the assessee is aggrieved by the action of DRP/AO in not including Akshay Software Technologies Ltd., in the final list of comparables chosen by the TPO. We have already seen that the assessee had chosen a set of 21 comparable companies and adopted the average of those companies operating profit /operating cost to arrive at the arithmetic mean of the comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he directions of DRP. On a reading of the order of the DRP and the contentions of the assessee, it is clear that DRP has wrongly mentioned the name of Akshay Software Technologies Ltd., as Akash Software Technologies Ltd. Therefore ground no.1(a) raised by the assessee is allowed and the AO is directed to consider Akshay Software Technologies Ltd as a comparable company in the final set of comparables. 11. As far as ground no.1(b) raised by the assessee is concerned, the same relates to including interest income of comparable companies Kuliza Technologies Ltd., and Inteq Software Ltd., while working out the operating profit/operating cost of these comparable companies. As far as this objection is concerned the DRP dealt with the same in page 29 of its order at para 8.2 as follows :- 8.2. This issue has been considered. The TPO is directed to consider foreign exchange gains as operating income. However one time or extra-ordinary expenses like Extra Ordinary Bad Debt like in the case of Kuliza Technologies Pvt. Ltd. Needs to be excluded therefore the action of the TPO to this extent is upheld. The contention of the assessee regarding interest income as non-operating is foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. This being the admitted position, we are of the view that there is no merit in ground no.5 raised by the assessee and we hold that for the purpose of comparability, multiple year data i.e., the weighted average of three financial years of the comparable companies cannot be used in TP Analysis as per the laws that existed for AY 2010-11. 16. As far as ground no.6 raised by the assessee is concerned, the same is with regard to the action of the TPO and the DRP in accepting E-Infochips Bangalore Limited and Inteq Software Limited as comparable companies with that of the assessee. As far as the aforesaid companies are concerned the facts are that admittedly the information regarding the financial statement of these two companies were not available in the public domain and the AO obtained the details about the financial results of these two companies by issuing notices u/s 133(6) of the Act to these two companies. At the time of hearing the ld. Counsel for the assessee brought to our notice that E-Infochips Bangalore Limited was not considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een merged with its Holding Company- Infinite Computer Solutions (India) Ltd. during the financial year 2011- 12. We are inclined to agree with the submissions of the Ld. AR that this Comparable Infinite Date Systems Pvt. Ltd. was created for purpose of transfer of business. Hence, the nature of services and business model of assessee company and comparable company are entirely different. Apart from this, we also find that there exist abnormal circumstances in the said comparable. During the last 3 years, variations in margins earned show an abnormal circumstances leading to huge fluctuations and supernormal profit, the margin earned by Infinite is 88.25% which is abnormally high. It was argued that such companies which are making more than twice the arithmetical mean margin as compared by the Ld. TPO should not be considered as comparable. The Ld. AR referred to page 591 of the Paper Book where the details of the fluctuation in the revenue, profit and margins has been provided. It is true that where company in which extraordinary events had taken place during the year like major acquisitions which had impact on profits of company, it could not be selected as comparable to assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd. to demonstrate that the said company is not diversified knowledge process outsourcing activities. It is seen there from that the said company is involved in Healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware and band width infrastructure required for the same, deployment of man power and service delivery in all these areas. It is also seen that it is engaged in legal process outsourcing. From Schedule-IV showing the fixed assets of the assessee, it is also seen that the said company owns goodwill/brand/IPRS (Intellectual Property Rights). From the notes to the accounts, it is also seen that a subsidiary of the company Asscent Infoserve Pvt. Ltd., has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary even in the case of Accentia Technologies Ltd., during the relevant financial year particularly since the approval of amalgamation has been given by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domain and the TPO had obtained the financial results by issuing of a notice u/s 133(6) of the Act. In the proceedings before DRP, on request by the assessee the TPO shared some of the details that he received from the aforesaid company. The details so obtained are at pages 613 to 617 of the paper book Vol.II filed by the asessee. The information shared shows that Inteq Software Limited is not purely software development service company and provides besides software development, consultancy services, data warehousing, EDI services besides Health Care BPO. The financial details of this company which was shred by the TPO in the course of proceedings before DRP, is at pages 269 to 297 of the assessee s paper book. Copy of profit and loss account was not given to the assessee. However schedule forming part of the profit and loss account has been furnished. The balance sheet has been furnished. The TPO in his order has worked out operating profit to operating cost of this company at 49.94%. On what basis this was worked out is not spelt out in the order of DRP except for a reference to the information received in response to the notice u/s 133(6) of the Act. It is noticed from the infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that this company is functionally not comparable to the assessee and it is having a different business model. The company is 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. Further it is stated from the records that the revenue is primarily driven from technical support and infrastructure in management services. 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 Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujitsu Fujitsu's associated companies. Infinite Data Systems commenced its operations on 1 st 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. The Id AR argued that these facts have also been acknowledged by the ld. TPO at page 77 .of. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extract of this companies financials at page 607 paper book-II wherein the fact that it is developing software products from July, 2009 and that the products will be available for sale to the customers during the financial year 2010-11 is clearly spelt out. Our attention was also drawn to the fact that in the profit and loss account there is reference to income from sale of licenses which is not the case normally in the case of companies providing software development services. Finally it was submitted that the segmental information of these companies is not available as the primary segment is based on geographical area. Our attention was also drawn to several cases decided by various benches of the Tribunal on the comparability of this company with a software development service provider such as the Assessee. We deem it appropriate to make mention of onlyh one such decision rendered by the ITAT Ahmedabad Bench in the case of I-Many Software Private Ltd. IT (TP) 222/Ahd/2015 order dated 27.10.2016 which is in relation to AY 2010-11 and rendered in the context of a software development service provider such as the Assessee. 22. We have considered the submissions of the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds of the paper book. The Profit Loss Account of this company is at page 107, which shows 'Sales Other income'. Bifurcation of 'Sales ' is available as per Schedule 12, which comprises of 'Sale of licence' amounting to ₹ 39.16 lac, 'Software services' amounting to ₹ 7.67 crore, 'Export from SEZ unit' amounting to ₹ 26,39 crare, 'Export from STPI unit' amounting to ₹ 16.88 crare and 'Revenue from subscription' amounting to RS.92.93 lac. These tiqures indicate that apart from the revenue from 'Software services' which is only to the tune of ₹ 7.67 crore, this company earned total grass revenue from 'Sales' to the tune of ₹ 52,27 crore including from export from SEZlSTPI units. When we consider the figures of this company on an entity level as have been adopted by the TPO for comparison, it becomes vivid that it ceases to be comparable with the assessee's 'Software development and maintenance support services' segment. The reason hardly needs any highlighting, being the income of this company also largely including, revenues from exports from SEZlSTPI units apar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities in pharmaceutical sector and that no segmental details of this company are available. It was brought to our notice that the ITAT Hyderabad Bench in the case of Pegasystems Worldwide India Pvt.Ltd. Vs. ACIT ITA No.1758/Hyd/2014 in relation to AY 2010-11 by order dated 16.10.2015 held that this company is not comparable with a software development services company such as the Assessee. 25. We have considered the submission and we find that in the case of Pegasystems Worldwide India Pvt.Ltd. (supra), a company engaged in rendering software development services such as the Assessee, the Hyderabad Bench held that this company is not comparable with a software development services company. The following were the relevant observations: 9.2. After considering the rival contentions, we are of the opinion that on the basis of information available, Comp-U-Learn Tech India Ltd., cannot be selected as a functionally comparable company as it has diversified activities. Only if there are segmental reports pertaining to software development services, then only the company can be taken as comparable company. In the absence of such information, it is very difficult to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational) is provisions Other than provision for bad debts. Therefore provision for bad debts was admitted by the TPO to be considered for arriving at the operating profit of the Assessee. Apart from the above, we find from the details of the provision for bad debts that the Assessee developed software for its client and the quality was not upto the mark owing to bugs in the software and therefore it was decided not to press for payment by the customer and the sum receivable was written off. Thus it was very much part of the operating expense of the company which will go to reduce the operating profit of the Assessee. Besides the above, the ITAT Ahmedbad Bench in the case of I-Many Software Private Ltd. (supra) for AY 2010-11, who is also a software development service provider like the Assessee, has taken note of the view of the DRP in that case, wherein the DRP held that bad debts written off should go to reduce the operating income of that Assessee as it was more in the nature of regular business expenditure. The tribunal accordingly directed the TPO to include bad debts as expenditure while working operating income of the comparable company Kuliza Technologies Pvt.Ltd. Respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions 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 differences in exceptional circumstances like gross under utilisation of assets/ resources and others, the entity with such a profile is required to be excluded. Consequently, it was not considered as comparable. It can be seen that the difference is on account of loss calculated by the TPO for FY 2008-09 at profit calculated by the assessee. In this regard, the relevant segmental account, as available in the annual report is reproduced below: SI. No. Particulars 31-Mar-2010 (Audited) 31-Mar-2009 (Audited) 1 SEGMENT REVENUE (a) Software Services 511.50 637.29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income as per segmental information 6,37,29,000 86,10,000 7,23,39,000 Operating Income as (per P L) 7,80,87,817 Income to be allocated from P L to segmental income (Allocation as a per cent of sales) 50,64,576 6,84,241 57,48,817 Total operating income 6,87,93.576 92,94,241 7,80,87,817 Segmental revenue Total operating revenue 88.10% 11.90% Segmental profit (Given) (15,00,000) (3,43,000) (18,43,000) Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 Income from Software Development, Product Services - Domestic: Software Services 19,40,663 6,52,093 19,40,663 6,52,093 14 Other Income: Interest Receipts 7,89,450 14,77,685 Foreign Exchange Gain 13,27,679 55,47,621 Dividend Receipts 0 400 Sundry Receipts 4,36,081 2,01,015 25,53,210 72,26,721 15 Cost of Services: From the above it becomes clear that the assessee has considered forex gain as part of operating income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 purpose of comparison of margins while determining ALP. The learned DR relied on the order of the TPO. 31. We have considered the rival contentions. From a perusal of the order of the TPO it is clear that the claim of the Assessee that this company s operating profit to operating cost of the software development services segment for AY 2009-10, if expenses are allocated on the basis of revenues, is 5.29%. This chart is extracted by the TPO in page-50 of his order ( and also in paragraph 27 of this order) and even the TPO does not dispute this plea of the Assessee. The TPO has however proceeded on the basis that foreign exchange gain sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count as on 31.3.2010 of this company was ₹ 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 ₹ 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 profits might be impacted by reason of related party transactions. That is not the case with this company as the RPT is less than 15%. Therefore there appears to be no valid reason for not regarding this company as a comparable company. The TPO is directed to regard this company as comparable company in the final list of comparable companies for the purpose of arriving at the arithmetic mean of profit margins of comparable companies. 34. As far as Grd.No.12 raised by the Assessee is concerned, the same is in relation to the grievance of the Assessee in not considering R.S.Software (India) Ltd., and Zylog Systems Ltd., as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows: 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 other slightly different economic circumstances; information on uncontrolled transactions taking place in the same industry but in other geographical markets; or information on uncontrolled transactions taking place in the same geographical market but in other industries, The above recommendation under the OECD Guidelines 2010 is also supported by the Advance Pricing Agreement Program Traoining Manual of USA which recognizes the need to relax the comparability criteria in order- to arrive at a wider set of companies: In the case of Actis Advisers Pvt Ltd (ITA No. 5277 /Del/2011) it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 more than 5% of the revenues by the TPO and DRP. His limited submission was the Assessee will not satisfy the test of its AMP being more than 5% of the revenues, if correct AMP expenses are taken. In this regard the learned counsel for the Assessee brought to our notice that the Special Bench of ITAT Delhi in the case of LG electronics India Pvt.Ltd., ITA No.5140/Del/2011 has taken the view that sales expenses are not part of the Advertising, Marketing and sales promotion. Our attention was drawn to the following observations of the special Bench: 18.3. Having heard the rival submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 AMP expenses to revenue will be below 5% and there would be no reason to exclude this company as comparable company. It was submitted that the fact that this company is otherwise comparable functionally is not disputed by the TPO. It was prayed that the issue may be set aside for the purpose of ascertaining the quantum of AMP to revenue after excluding sales expenses and if the comparable companies pass the test, then they should be included in the list of comparable companies. The learned DR relied on the order of the TPO/DRP. 38. We have given a careful consideration t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 arrived at after giving appropriate adjustments. In such circumstances, we are of the view that it would be safe to exclude these two companies from the list of comparable companies. We therefore confirm the order of the DRP on this issue. 41. As far as Gr.No.15 and 16 are concerned, they project the grievance of the Assessee in the action of the TPO and DRP in not allowing adjustments to the arithmetic mean of profits of the final comparable companies towards working capital and other risks which according to the Assessee are required to be given under the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 that the comparability has to be Judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. In our view, the average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins. 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 overall cost of production of goods or services by the AE gets reduced which in turn increases the competitiveness of the AE in the market. Thus the assessee is not compensated for the reduction of risk attributable to the operations carried on by the assessee in India. The risk profile of the comparables selected by the assessee, acceptable to the assessee and those selected by the TPO but not acceptable to the assessee is similar. It is incorrect to say that higher the risk, the higher is the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 identified. Needless to say as mentioned in OECD TP Guidelines, the exercise requires judgment and it is practically not possible to quantify the difference in exact numeric terms and would have to be based on most reliable methods/estimates. What is to be appreciated is whether an independent enterprise would agree for such adjustment to the price in the facts and circumstances surrounding the transaction. It has been held in Symantech software solutions Pvt. Ltd. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed 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 in the present case as we have already seen that though the nomenclature used by the assessee was bad debts the reality is that the amount written off as bad debts is like sales return, where customers have not paid for software development because they did not find software due to existence of bugs. It has a direct nexus with the business and transaction for which the arms length price is to be determined, therefore the same has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 42,58,767 as per the Appellant s books of account and in granting deduction of depreciation as per Rules of ₹ 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 allowed while working the book profits is always as per the Companies Act and the depreciation should not be reduced as is done in the normal assessments by substituting the depreciation claimed under the Companies Act by the depreciation allowable under the Act. The action of the AO is per se unsustainable and the AO is directed to deduct depreciation only as per the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X
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