TMI Blog2021 (4) TMI 1080X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the Bangalore Bench of the Tribunal in assessee s own case for A.Y. 2008-09 following the decision of the Hon ble Delhi High Court in the case of CIT v. EHPT India (P) Ltd. [ 2011 (12) TMI 49 - DELHI HIGH COURT] and for A.Y. 2009-2010 [ 2014 (11) TMI 849 - ITAT BANGALORE] has upheld the method of allocation of the common expenses adopted by the assessee and held that where two basis of apportionment of common costs are available, any one of the basis should be consistently followed. Thus, since Cisco India has been following headcount basis for allocation from past 8 years the same basis should be followed for A.Y. 2008-2009 as well. Further, the headcount basis of allocation of common expenses should be followed for A.Y. 2010-2011 as well. Disallowance of deduction claimed in respect of forex fluctuation which is capital in nature - assessee failed to furnish the details with regard to the foreign exchange gain / or loss along with evidences to support the same - HELD THAT:- As decided in own case [ 2014 (11) TMI 849 - ITAT BANGALORE] the foreign exchange gain from software development services has to be considered as part of the income from software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law: Original grounds: A. Grounds of appeal relating to corporate tax matters 1.The learned AO has erred in law and in fact, by not considering the plea of the Appellant that communication expenses (in the nature of internet charges) should not be reduced from export turnover for the purpose of computing deduction under Section 10A and 1OB of the Act, respectively 2.The learned AO has erred in law and in facts by disregarding the methodology adopted by Appellant in allocating the common/ indirect costs among its various business segments; 3.The learned DRP/ AO have erred in law and in fact by withdrawing the deduction claimed by the Assessee in the return of income filed amounting to INR 40,23,03,313 in respect of forex fluctuation which is capital in nature B. Grounds of appeal relating to transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies which do not own intangibles and are pure service providers; 12. The learned TPO / learned AO have erred in law and in facts, by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%; Modified grounds: 13. The learned TPO / learned AO have erred in law and in facts, by accepting/rejecting following companies based on unreasonable comparability criteria: 13.1. For software development services segment, Persistent Systems Limited should not be selected as comparable to the Appellant 13.2. Following companies should be selected as comparable to the Appellant in relation to the software development services segment: (a) Akshay Software Technologies Limited (b) Goldstone Technologies Limited (c) LGS Global Limited (d) Reliance Infosolutions Private Limited (e) Crazy Infotech Limited (f) Teledata Marine Solutions Limited (g) Cat Technologies Limited (h) CG-Vak Software Exports Limited (i) Cigniti Technologies Limited 13.3. For Technical support services segment, Accentia Technologies Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant. 15F. The learned TPO/AO have erred in law and in facts, by not making suitable working capital adjustment while computing operating margins for the Appellant vis-a-vis the com parables. Original Grounds: c. Grounds of appeal relating to other matters 16.The learned AO has erred in law and in facts by providing credit to the taxes deducted at source only to the extent of INR 8,01,53,278 as against INR 8,35,65,585 claimed by the Appellant in its return of income and as allowed by the learned AO while passing the draft assessment order. 17.The learned AO has erred, in law and in facts, by considering an amount of INR 34,36,61,090 as refund issued under section 143(1) of the Act in computing the demand coupled with erroneously levying an interest amounting to INR 7,38,87,135 under section 234D of the Act. 18. The learned AO has erred in law by levying interest of INR 27,34,46,800 under section 234B of the Act, which is on account of the adjustments proposed to the returned income. 3. The grounds raised by the Revenue read as follows:- 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he qualitative and quantitative filters applied by the TPO. 10. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel is correct in excluding INFOSYS BPO Ltd on the basis of decision in a different case for a different FY while the comparable is qualifying all the qualitative and quantitative filters applied by the TPO. 11. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel is correct in holding that Eclerx Services Ltd cannot be taken as comparable, being functionally different when it satisfies all the qualitative and quantitative filters applied by the PO. 12. On the facts and in the circumstances of the case whether the Hon ble Dispute Resolution Panel was right in super imposing the decision of other benches of ITAT in the case of assessee to reject the comparables viz Mis Eclerx Services Ltd and Infosys BPO Ltd when selection of com parables in a case depends in transfer pricing on assessee specific FAR analysis. 13. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel instead of relying on decision of other benches of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 21. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. CORPORATE TAX MATTERS 4. The first ground in assessee s appeal is with regard to not considering the plea of the assessee that communication expenses should not be excluded from the export turnover for the purpose of computing deduction u/s 10A of the I.T.Act. 4.1 After hearing both the parties, we are of the opinion that this issue came up for consideration before the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Limited 349 ITR 98, wherein held that for the purpose of computing exemption u/s 10A of the Act, when export turnover in the numerator is to be arrived after excluding telecommunication expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. 4.2 The same judgment was followed in assessee s own case in ITA No.65 to 67/2011 for assessment years 2003-2004 and 2004-2005 vide judgment dated 18th October, 2011 by the Hon ble jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are available, any one of the basis should be consistently followed. Thus, since Cisco India has been following headcount basis for allocation from past 8 years the same basis should be followed for A.Y. 2008-2009 as well. Further, it was also submitted that the headcount basis of allocation of common expenses should be followed for A.Y. 2010-2011 as well. 5.2 After having heard the objections of the assessee, the DRP noticed that the allocation made by the assessee to the various segments is not correct which is evident from the information given in the table below :- Segment Profit % on cost of reimbursed as per the agreement with the AE Profit % as per the segmental information given by the assessee Software development 10 11 Technical Services 10 17.65 Marketing support Services 10 10 Administrative Support Services 10 13.89 Management Support Services 10 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible for deduction u/s 10A of the Act. The assessee is stated to be following head-count of personnel as the basis for allocation of the common and indirect expenses while the AO seeks to allocate the common expenses on the basis of the turnover of each segment. As narrated in the above paragraphs, the assessee is into various activities and the assessee is eligible for deduction u/s 10A of the Act only with regard to software development activity which is set up in STPI. The assessee had explained in detail before the AO the methodology and as to how the total expenditure of ₹ 207 crores has been bifurcated into ₹ 120 crores which is towards the common cost excluding IT and ommunication support cost and ₹ 87 crores which is common costs only in relation to IT and communication cost. The software development would fall within the second category i.e. IT and communication cost and its employees who are involved in such IT and communication are considered for allocation of the expenditure. The AO, in the draft assessment order, has considered number of employees in STPI and SEZ division and has 'come to the conclusion that the assessee is not following head-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has given detailed explanation as to how it is allocating the expenditure between various units on the basis of headcount but both the AO as well as the DRP have failed to consider the factual aspects of the said submission. In view of the same, while upholding the method adopted by the assessee for allocation of common expenses, we remand the issue to the file of the AO only for verification of the number of employees and the expenditure allocated to such employees. Ground No.3 is accordingly allowed for statistical purposes. 5.7 We also find that the Department has challenged the above order of the Tribunal before the Hon ble High Court of Karnataka. The Hon ble High Court in ITA No.140/2014, vide judgment dated 12th July, 2018, decided the issue in favour of the assessee. Being so, taking the consistent view, we allow this ground of appeal in favour of the assessee, and uphold the view taken by the Tribunal in the first round of appeal (in ITA No.1510/Bang/2012 - order dated 31.10.2013). 6. Ground No.3 of the assessee s appeal is with regard withdrawing the deduction claimed by the assessee in its return of income amounting to ₹ 40,23,03,313 in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to file the submissions. It is in the knowledge of the assessee that the directions uls 144C cannot be issued in this case after 31-12- 2014, and in such circumstances, the time cannot be allowed beyond 30-12-2014. However, the assessee failed to furnish the information till the date of issue of the directions by this order. In such circumstances, the DRP issued following directions to the Assessing Officer:- (i) direct the Assessing Officer to allocate the net foreign exchange loss of ₹ 3,68,11,310/- to the 5 segments mentioned in Paragraph 25 of the order of TPO based on the % of operating revenue of the relevant segment to the total revenue and then the operating cost to be increased by adding the proportionate foreign exchange loss to the cost of relevant segment for making the adjustment uls 92CA of the Income-tax Act as it is evident from the Appendix - B to the TP documentation that exchange loss was ₹ 54,13,17,857/- was netted to the exchange gain of ₹ 20,45,06,547/- and the net foreign exchange loss of ₹ 33,68,11,310/- was debited to the profit and loss account under the head' Operating and other expenses'. Further, on perusal of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign exchange gain of ₹ 20,45,06,547/- is on capital account, then the allocation of gross foreign exchange loss of ₹ 54,13,17,857/-(instead of net foreign exchange loss of ₹ 33,68,11,310/-) is required to be made to the operating cost of 5 segments in accordance with the directions in (i) above for making adjustment u/s 92CA and the deduction of ₹ 20,45,06,547/- will be allowed instead of ₹ 40,23,03,313/- (₹ 25,26,39,693 + ₹ 14,40,19,285/- ₹ 56,44,335/-) in computing the total income unless it is established that the corresponding amount of ₹ 40,23,03,313/- has been credited to the profit and loss account. (b) The Assessing Officer is also directed to consider the foreign exchange fluctuation (loss or gain) as operating In nature while computing the margins in respect of comparables retained by this order to determine the mean margin of the comparables for the relevant segments for the purpose of adjustment u/s 92CA of the Income-tax Act. 6.3 The contention of the AR is that for assessment year 2009-2010 also, the assessee has incurred foreign exchange loss of ₹ 33,68,11,257 and the same has been credited to the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. Our contention for considering such expenses as capital has been provided in below. It is to be noted that of the Exchange gain of ₹ 14,40,32,302 on restatement of creditors for fixed assets are not taxable in view of the decisions of Supreme Court decision in case of Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1) and Bombay HC decision in case of V.S. Dempo Co Pvt. Ltd (206 ITR 291), which has specifically held that gain/ loss on arising on fixed capital on account of alteration in exchange rate is capital in nature. Further, in connection with foreign exchange gain of ₹ 25,26,39,693 incurred on share application money, it is submitted that same is capital in nature, in view of Delhi HC decision in case of Jagatjit Industries Ltd (337 1TR 21), which has held that since amount raised through issue of equity shares is to be treated as capital receipt irrespective of the end use of the share capital and, therefore, the gains on account of foreign exchange fluctuations in respect of share capital collected in foreign exchange is capital receipt. Given the above, the assessee wishes to submit that foreign exchange gain on account of capital account transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge gain / or loss along with evidences to support the same. We also find that identical issue came up before the Tribunal in assessee s own case in IT(TP)A 271/Bang/2014 (order dated 14.08.2014), wherein the Tribunal held as under:- 23. We have considered the rival submissions. In the course of hearing before us, the ld. counsel for the assessee also filed a segment wise break up of foreign exchange fluctuation gain, the same is given as Annexure-I to this order. It can be seen from the aforesaid chart given by the assessee that the total foreign exchange gain on account of realization of proceeds from debtors, taken to creditors, inter-company statements etc. was a sum of ₹ 179,01,08,756. Out of the above, the assessee on his own has excluded foreign exchange fluctuation on account of advances towards share capital charged to P L account and foreign exchange fluctuation in the matter of purchase of fixed assets charged to P L account. It is thus clear from the chart that a sum of ₹ 37,89,23,185 which was sought to be added as part of the operating income on rendering software development services is only on account of transactions of rendering software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude the above company from the comparables. 7.1.1 We have heard rival submissions and perused the material on record. We find that this issue was considered by the Co-ordinate Bench of the Tribunal in the case of DCIT v. M/s.Electronics for Imaging India Pvt. Ltd. In IT(TP)A No.212/ Bang/ 2015 for assessment year 2010-2011, vide order dated 24.02.2016, wherein the Tribunal held as under:- 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- Having heard the contentions, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Infosys Limited from comparables. 7.2.2 After hearing both the parties and perusing the relevant material on record, we find that this issue also considered by the Co-ordinate Bench of the Tribunal in case of DCIT v. M/s.Electronics for Imaging India Pvt. Ltd. in IT(TP)A No.212/Bang/2015 (supra), wherein the Tribunal held as under:- 19. We have heard the ld.DR as well as ld.AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (2015) 58 taxmann.com 167 (Delhi-Trib.), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon ble Delhi High Court. The Hon ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 23.11.2012. We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. Persistent Systems Limited 7.4 The ld.DRP observed that the receipt of ₹ 6.67 crore has been shown from sale of software services and products. However, no segmental information is available in regard to software services and products separately. Therefore, the DRP was of the view that in absence of segmental information, Persistent Systems Limited cannot be retained as comparable, and accordingly, they directed the AO to exclude the said company from the list of comparables. 7.4.1 After hearing both the parties and perusing the material on record, we find that Persistent Systems Limited has been excluded from the list of comparables by the Tribunal in the case of CGI Information Systems and Management Consultants Private Limited v. ACIT in IT(TP)A No.586/Bang/2015 183/Bang/2017 for assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Acropetal Technologies Limited 8.1 The ld.DRP after examining the Annual Report of this company observed from the profit and loss account that out of the total expenses of ₹ 87.26 crore, the expenses of ₹ 55.85 crore incurred on Onsite development of software which works out to 64% of the total expenses which makes it clear that the company is predominantly engaged in providing services Onsite and therefore, not comparable with the assessee. The DRP also held that the employees cost filter need to be applied in ITS segment also, on that account also as the employees cost is less than 25%. Accordingly, the DRP directed the AO to exclude Acropetal Technologies Limited from the list of comparables. 8.1.1 After hearing both sides, we find that this issue came for consideration before the Co-ordinate Bench of the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015. The Tribunal vide order dated 25th January, 2017 for assessment year 2010-2011 held as under:- 13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for the Assessment Year 2008-09 has excluded these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by this company and its functional profile, the company is also mainly engaged in providing highend services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. The ld.DRP also followed the orders of the ITAT Bangalore in the case of First Advantage Offshore Services Pvt. Ltd. V. DCIT [ITA No.1086/Bang/2011] and Symphony Marketing Solutions India Pvt. Ltd. V. ITO [ITA No.1316/Bang/2012], wherein also the Tribunal directed the AO to exclude Eclerx Services Limited from the list of comparables. 8.2.1 After hearing both sides, we find that similar issue was considered by the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), wherein the held as under:- 14.1 We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs are compared with the functional profile of M/s eClerx Services Pvt.Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. 14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P) Ltd (supra), this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services. It has two business verticals financial services, retail and manufacturing. It was found to have being providing complete business solutions in the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. 8.2.2 Being so, the exclusion of Eclerx Services Limited from the list of compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Services Ltd. f) Genesys International Corpn. Ltd. g) Mold Tek Technologies Ltd. We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1202/Del/2015 as well as in the case of ITO Vs. Interwoven Software Services (India) Pvt. Ltd. in ITA No.461/Bang/2015. Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1540/Bang/2012 has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to exclude these companies from set of comparables. 8.3.1 In view of the above order of the Tribunal (supra), we confirm the exclusion of ICRA Online Limited from the list of comparables. Infosys BPO Limited 8.4 The ld.DRP observed that this company is an established player in the BPO industry and also a market leader and has tremendous brand value attached to it which has a significant impact on its pricing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 15.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r inclusion of this comparable in the list of comparables. Accordingly, we direct the A.O. to include Sundaram Business Services Limited as a comparable. MARKETING SALES AND SUPPORTING SERVICES 11. The learned Departmental Representative urged for inclusion of the following comparables:- (i) HCCA Business Services Private Limited (ii) Killick Agencies Marketing Limited HCCA Business Services Private Limited 11.1 The learned AR submitted that this company is engaged in HR consultancy services like payroll processing and compensation structuring, HR operations and administration, management of labour and legal compliances, reimbursement processing, accounting services. The ld.DRP noticed that except Note 2.14 in the Annual Report there is no other observation, from which it can be established that the company is engaged in marketing and sale services, comparable to the assessee. Thus, directed the AO to exclude the above company. 11.1.1 After hearing both the parties and perusing the material on record, we find that this issue was considered by the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. in IT(TP)A No.212/Bang/2015 (orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra), wherein it was held as under:- 44. The assessee objected against this company on the ground that commission/service charges income of this company is ₹ 2,19,00,000 out of the operating revenue of ₹ 3,39,00,000. Therefore, the commission/ service charges income constitute about 65% of the operating revenue which is less than 75% of the operating revenue filter applied by the TPO. In the absence of segmental results, this company was sought to be excluded from the set of comparables. 45. The DRP found that this company conducts business as an agent of the foreign principal and deal in maritime equipments. Further, the receipts are mainly in the nature of commission income and service charges. Therefore, this company was functionally dissimilar to that of assessee. 46. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. 47. The ld. DR has submitted that the TPO has considered the relevant information as reported in the annual report of the company and it was found that this company is acting as an agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition IT(TP)A No.212/Bang/2015 CO No.94/Bang/2015 Page 25 of 33 Conference Ltd., a comparable selected by the TPO and retained by the DRP. 51. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the assessee and held that this company received income in the nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to the functions carried out by the assessee. 52. Before us, the ld. AR of the assessee has submitted that functional comparability of this company has been examined by the Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. vide order dated 20.11.2015 in ITA No.22/Mum/2015 and submitted that the Mumbai Tribunal has held that the operation of organizing exhibition and events is not comparable with support services provided by the assessee to its AE in respect of reinsurance and actuarial activities. Thus, the ld. AR has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee s objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal vide its order dated 14th August, 2014 held as under:- 28. The ld. counsel for the assessee also submitted before us that the assessee had sought for risk adjustments, but the same has not been considered by the TPO. In this regard, our attention was drawn to the following submissions made before the revenue authorities:- 17.1 The Appellant functions under a limited risk environment with most of the risk being assumed by its AE. The Appellant bears lesser limited business risks than independent comparable companies due to the nature of its revenue model as it is guaranteed profits by way of a mark-up on costs incurred, in provision of the software development services. However, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. 17.2 Rule l0B(l)(e)(iii) of the Rules provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 susxtain the business of the tested party. But in case of the taxpayer there being only one client, the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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