TMI Blog2018 (5) TMI 1808X X X X Extracts X X X X X X X X Extracts X X X X ..... materially affected if the foreign exchange gain is considered as reflected in the accounts of the comparable companies as available in public domain. Respectfully following the decision of the ITAT Bangalore in the case of SAP Labs (2010 (8) TMI 676 - ITAT, BANGALORE) we hold that the DRP was justified in directing the AO to consider the foreign exchange gain or loss as operating in nature. Therefore, in light of the above, this ground of the Revenue is liable to be dismissed Regarding 1% risk adjustment, it is settled position that assesses that are captive service providers assume less risk compared to companies in an uncontrolled situation and therefore, an adjustment is to be provided to the margins of the comparables to mitigate the said difference. This Hon'ble Tribunal has consistently upheld the above approach and has directed the grant of risk adjustment to the margins of the comparables. In this regard, reference may be made to the decision of ITAT Bangalore Bench in the case of Bearing Point Business Consulting (PR) Ltd. v. DOlT (2014 (4) TMI 997 - ITAT BANGALORE), where this Hon'ble Tribunal has directed the grant of risk adjustment in the case of an assessee placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the assessment year 2011-12. In terms of Sec.92 of the Act, the Arm s Length Price (ALP) of the three of the international transactions was determined by the Transfer Pricing Officer (TPO), in terms of Sec.92CA of the Act. (i) As far as provision of SWD Services are concerned, the TPO was of the view that the as against a price of ₹ 187,42,64,681/- which was the consideration received by the Assessee from its AE for providing SWD Services, the TPO was of the view that the Assessee ought to have charged a price which was more by a sum of ₹ 21,64,56,0871- and accordingly an addition to the total income by way of adjustment to ALP to the extent of ₹ 21,64,56,087/- was made by the AO in the draft order of assessment dated 30.3.2015. (ii) As far as provision of ITES is concerned, the TPO was of the view that the as against a price of ₹ 10,70,09,444/- which was the consideration received by the Assessee from its AE for providing ITES, the TPO was of the view that the Assessee ought to have charged a price which was more by a sum of ₹ 94,66,683/- and accordingly an addition to the total income by way of adjustment to ALP to the extent of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating profit (Operating income Operating cost was ₹ 20,83,98,414/-. Thus the OP/TC was arrived at 12.50%. The Assessee chose companies who are engaged in providing similar services such as the Assessee from the prowess and capitaline Plus Data Base. The Assessee identified 16 companies whose average arithmetic mean of profit margin was less than the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm s Length. 10. The TPO to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from the same database from which the Assessee had chosen comparable companies, viz., Prowess and Capitaline Plus. The TPO accepted only 2 out of the 16 companies chosen as comparable company by the Assessee viz., Mintree Ltd., and Persistent Systems Solutions Ltd. He rejected the remaining 14 companies as not comparable with the Assessee. The TPO on his own identified 11 other companies as comparable with the Assessee company and worked out the average arithmetic mean of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the Assessee s plea is to exclude 9 companies out of the 13 companies chosen by the TPO and to include 3 companies chosen by the Assessee in its TP study which were rejected by the TPO. 15. We will first deal with the plea of the Assessee for exclusion of comparable companies chosen by the TPO. The first company which the Assessee seeks exclusion is Accropetal Technologies Ltd. On exclusion of this company, we have heard the rival submissions. We find that the TPO has himself applied a filter for exclusion of companies for the purpose of comparison, viz., revenue from software development service should be more than 75% of the total operating revenue. The admitted factual position is that revenue from software development service of this company was 81.40 Crores out of the total operating revenue of ₹ 141 Crores. Thus the revenue from software development is admittedly less than 75% of the total operating revenue of this company. Therefore his company has to be excluded from the list of comparable companies. It was also brought to our notice that the ITAT Bangalore in the case of Applied Materials Pvt.Ltd., in IT (TP) A.No.17 39/Bang/2016 for AY 2011-12 order dated 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Applied Materials Pvt.Ltd., a company which was also engaged in providing software development services, in IT (TP) A.No.17 39/Bang/2016 for AY 2011-12 order dated 21.9.2016, was pleased to remand the question of inclusion of this company for fresh consideration by the AO/TPO. Respectfully following the decision of the Tribunal, we set aside the order of the TPO/DRP/AO excluding this company as a comparable company and remand the issue of comparability of this company be considered afresh by the TPO/AO. 19. As far as the plea for including the other two companies viz., Thinksoft Global Ltd., and FCS Software Ltd., we find both these companies were excluded by the TPO for the reason that the working capital adjustment was very high. ITAT Bangalore Bench in the case of VMware Software India Pvt.Ltd. Vs. DCIT in IT (TP) A.No.1311/Bang/2014 order dated 6.1.2017 has held that a company which is otherwise comparable cannot be excluded for the reason that the working capital adjustment to be done was very high. In view of the aforesaid decision, we are of the view that this company, which was otherwise found to be comparable, be included in the list of comparable companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were rejected by the DRP. The DRP directed (i) the inclusion of foreign exchange gain while computing the margin of the Assessee, (ii) verification and rectification of errors in computing the margins of the Assessee and (iii) verification and rectification of errors in computing the working capital adjusted margins of the comparables as was done in SWD segment. The DRP, for this segment also upheld the methodology adopted by the TPO in computing the working capital adjustment and the restriction of the same. 23. Pursuant to the directions of the DRP, the aggregate TP adjustment made by the TPO stood reduced. In effect, the TP adjustment made by the TPO in respect of the ITES segment of the Assessee survived post the DRP's directions. 24. Before the Tribunal, the Assessee seeks exclusion of the following 5 companies from the list of comparable companies adopted by the TPO viz., (i) Accentia Technologies Ltd., (ii) Accropetal Technologies Ltd., (iii) ICRA online Ltd., (iv) Jeevan Scientific Technology Ltd. and (v) iGate Global Solutions Ltd. 25. As far as Accentia Technologies Ltd., Accropetal Technologies Ltd., and Jeevan Scientific Technology Ltd., are concerned, IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating profit (Operating income Operating cost was ₹ 24,96,391/-. Thus the OP/TC was arrived at 12.55%. The Assessee chose companies who are engaged in providing similar services such as the Assessee from the prowess and capitaline Plus Data Base. The Assessee identified 5 companies whose average arithmetic mean of profit margin was 9.39% which was less than the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm s Length. 29. The TPO to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from the same database from which the Assessee had chosen comparable companies, viz., Prowess and Capitaline Plus. The TPO rejected all the companies chosen as comparable company by the Assessee and on his own chose three companies and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows: 30. On objections to the addition made by the AO based on the report of the TPO, the DRP rejected the Assessee's conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the TPO/AO failed to pass orders in line with the DRP's directions and therefore there exist certain errors in the margins of the above comparables. It is thus submitted that the AO/TPO be directed to verify the operating margins of the companies that survive. We are of the view that the prayer made on behalf of the Assessee deserves acceptance. The TPO/AO is directed to verify the errors pointed out as above and do fresh computation as may be necessary. 34. The next grievance common to all the three segments projected by the Assessee is that AO/TPO erred in not granting an appropriate working capital adjustment to the margins of the comparable companies and further erred in not rectifying the mistakes in the computation of the same (Ground Nos. 9 of the revised concise grounds of appeal). 35. It was submitted by the learned counsel for the Assessee that the TPO, while granting working capital adjustment in respect of the Assessee's SWD and ITES segment, has arbitrarily and unreasonable restricted the same at 1.63% and 1.47% respectively, without providing any legal basis or rationale for limiting the working capital adjustment to the said percentage (page No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceivables and payables of the comparable companies are wrongly considered which ought to be rectified. The details regarding the average receivables and payables of the comparables are provided at page Nos. 512-514 of the paperbook. Therefore, the working capital adjustment ought to be allowed on actuals upon taking into consideration the correct value of receivables and payables. We are of the view that it would be appropriate to direct the TPO/AO to examine the grievance of the Assessee in this regard and re work the working capital adjustment in accordance with law. IT(TP)A No.491/Bang/2016 (Revenue s Appeal) 37. As far as the grievance projected in its appeal is concerned, the same are as follows: 1. The DRP has erred in holding that the foreign exchange fluctuation is operating in nature and therefore the margin of the Assessee has to be computed upon including the gains from the said fluctuation. (Ground Nos. 2 to 4) 2. The DRP erred in granting risk adjustment at the rate of 1% without appreciating the facts and case of the comparables (Ground No. 5) 38. As far the issue treating foreign exchange gain as operating revenue is concerned, it has been held in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the terms of credit are almost identical in the line of business of SWD Services and ITES. 39. We have considered the rival submissions and are of the view that the in the light of Rule 10B(3) of the Rules and the business cycle in the relevant business, the comparability will not be materially affected if the foreign exchange gain is considered as reflected in the accounts of the comparable companies as available in public domain. To this extent the decision rendered by the Bangalore Bench of ITAT in the case of Comscope Networks (India) Pvt.Ltd. (supra) is distinguishable. Therefore respectfully following the decision of the ITAT Bangalore in the case of SAP Labs (supra), we hold that the DRP was justified in directing the AO to consider the foreign exchange gain or loss as operating in nature. Therefore, in light of the above, this ground of the Revenue is liable to be dismissed 40. As far as the other ground in revenue appeal regarding 1% risk adjustment, it is settled position that assesses that are captive service providers assume less risk compared to companies in an uncontrolled situation and therefore, an adjustment is to be provided to the margins of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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