2018-VIL-1674-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA No. 4434/DEL/2018

Date: 26.09.2018

ST-ERICSSON INDIA PVT. LTD.

Vs

THE DY. C.I.T, CIRCLE – 24 (2) , NEW DELHI

For the Assessee : Shri S.D. Kapila, Adv, Shri R.R Maurya, Adv
For the Revenue : Shri H.K. Choudhary, CIT-DR, Ms. Anchal Khandelwal, Sr.DR

BENCH

SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

JUDGMENT

PER N.K. BILLAIYA, ACCOUNTANT MEMBER,

This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] – dated 24.04.20187 framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] pertaining to assessment year 2013-14.

2. The assessee has raised the following substantive grievances:

“1. That on the facts and in the circumstances of the case, the learned Transfer Pricing Officer ("Ld. TPO"), Hon'ble Dispute Resolution Panel ("Hon'ble DRP") and the learned Assessing Officer ("Ld. AO") has erred in making transfer pricing ("TP") adjustment of INR 11,58,07,710 in respect of international transaction of "provision of Integrated Circuit ("I/C") design implementation, maintenance/ software development services:

2. That the Ld. TPO/ Hon'ble DRP/ Ld. AO erred on facts and in law in:-

2.1 rejecting the arm's length price ("ALP") determined by the Appellant and in conducting a fresh economic analysis by applying inappropriate filters;

2.2 the Ld. TPO erred in law in applying certain filters for selecting/ excluding comparables;

2.3 excluding companies selected by the Appellant as comparables (such as Cignity Technologies Limited, Caliber Point Systems solutions Limited, R Systems International Limited (Seg), etc.);

2.4 ignoring the information contained in respective annual reports and decisions of the Hon'ble Tribunal and High Court for selecting inappropriate comparables (such as Persistent Systems Ltd, Thirdware Solutions Ltd, etc.);

2.5 computing the operating profit margins of the comparables finally selected for benchmarking the international transaction;

2.5.1 by treating provision for bad and doubtful debts charged to Profit & Loss account as non-operating in nature;

2.6 not accepting the risk adjustment carried out by the Appellant despite the fact that the UL'TPO had proposed to grant the same in the show cause notice dated October 6, 2017 issued to the Appellant;

2.7 in initiating penalty proceedings under Section 271(l)(c) of the Act.”

2. Briefly stated, the facts of the case are that the assessee is engaged in provision of services of intermediate stage of design and development of software parts of Integrated Circuits [ICs] involving implementation, verification and maintenance services. The appellant company works as per the specification provided by the Group. It performs limited functions in the intermediate stage of the design and software development for the associated enterprises [AEs].

3. This functional profile of the appellant company has been accepted by the co-ordinate bench in ITA No. 1672/DEL/2014 for assessment year 2009-10. The relevant observations of the co-ordinate bench read as under:

 “30. So, we are of the considered view that the assessee being a hardware designer, a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any products or works and works only on the specification provided by the STE Group for the implementation of IC design, its maintenance, verification and software development. So, the role of STE is that of a contract captive design centre and as such, the findings of the TPO in this regard cannot be interfered with.”

4. For the year under consideration, the appellant filed return of income declaring income of Rs. 16.97 crores which was assessed at Rs. 28.55 crores after making addition on account of order of the TPO u/s 92CA(3) amounting to Rs. 11.58 crores.

5. The international transactions during the year as per Form 3CEB report is as under:

Provision of IC design and software development services

Rs. 2,23,91,92,485/-

6. The assessee adopted TNMM as the most appropriate method and the PLI was determined by operating profit/operating cost. The summary of financial statements of the appellant is as under:

Integrated Circuit Design, Implementation & Maintenance / Software Development	2,23,91,92,485		2,23,91,92,485	2,23,91,92,485
Service & Marketing Activities	8,94,93,546		8,94,93,546	8,94,93,546
Foreign exchange fluctuation Gain (Net)	3,73,28,435		3,73,28,435	3,73,28,435
Interest on bank deposits		8,71,438	8,71,438	8,71,438
Profit on sale of fixed assets		1,39,04,893	1,39,04,893	1,39,04,893
Gain on cancellation of lease		1,77,606	1,77,606	1,77,606
Miscellaneous Income	7,18,360		7,18,360	7,18,360
Consideration of Transfer of Assembled work force		2,01,17,159	2,01,17,159	2,01,17,159
Total operating Income	2,36,67,32,82	3,50,71,096	2,40,18,03,922	2,40,18,03,922
Expenditure
Personnel Expenses	1,28,36,25,72		1,28,36,25,728	1,28,36,25,728
Administrative and general expenses	76,83,61,456		76,83,61,456	76,83,61,456
Depreciation	11,69,28,189	82,15,593	12,51,43,782	12,51,43,782
Total operating Cost	2,16,89,15,37	82,15,593	2,17,71,30,966	2,17,71,30,966
Operating/Net Profit	19,78,17,453			22,46,72,956
Operatinq Profit/Operating Revenue
Operatinq Profit/Operating Cost		9.12%

7. The assessee used 25 comparables and the margin summary of comparable companies is as under:

	Name of the company	Year wise OP/OC			Weighted average of cost (%)
		FY 2010-	FY 011-12	FY 2012-13
1	Akshay Software Technologies	.	9.19%	7.16%	5.96%
2	Blue Star Infotech Limited (Consolidated)	8.17%	2.06%	NC	4.97%
3	Caliber Point Business Solutions Limited (Segmental)	0.86%	S.40%	1.59%	1.77%
4	Cat Technologies Limited	-1.58%	-4.21%	NA	-2.98%
5	CG-VAK Software & Exports	2.90%	-17.11%	12.38%	-0.77%
6	Ciqniti Technologies Limited	1.82%	2.29%	NA	2.09%
7	Evcke Technologies Private Limited	7.19%	10.58%	NA	9.45%
6	Goldstone Technologies Limited	1.42%	5.34%	NA	1.97%
9	Helios & Matheson Information	11.45%	9.45%	10.80%	10.54%
10	Larsen & Toubro Infotech Limited	16.05%	20.44%	NA	18.46%
11	Lucid Software Limited	45.12%	13.42%	NA	25.90%
12	Maveric Systems Limited	-11.69%	NA	NA	-11.69%
13	Mindtree Limited (Segmental)	9.21%	13.59%	15.27%	13.24%
14	Persistent Systems and Solutions Limited	14.87%	NA	NA	14.87%
15	Persistent Systems Limited	24.30%	23.43%	25.52%	24.50%
16	R S Software (India) Limited	15.34%	14.08%	16.67%	15.44%
17	R Systems International Limited (Segmental)	4.91%	0.40%	11.54%	5.76%
18	Sasken Communication Technologies Limited (Segmental)	27.39%	9.32%	3.15%	12.88%
19	Satyam Computer Services Limited-	8.27%	IS.85%	NA	12.86%
20	Saven Technologies Limited	15.86%	NC	NA	15.86%
21	Silverline Technologies Ltd	11.29%	NA	NA	11.29%
22	Thinksoft Global Services Limited	-0.61%	9.94%	. -b m	10.61%
23	Thirdware Solutions Limited	16.45%	^ NA	NA	16.45%
24	Virant Digital Limited	10.24%	NC	NA	10.24%
25	Zyloq Systems Limited	22.63%	24.22%	NA	23.53%
	Arithmetic mean				10.13%

8. The arithmetic mean of the comparables, as can be seen from the above, is 10.13% and that of the OP/OC of the appellant is 9.12%.

9. The TPO used the following comparables for bench marking the international transactions relating to provision of IC design and software development services as under:

S.No	Company Name	Corrected	Adjusted
. 1	Acropetal Technologies Ltd. (Seg.)	11.58OP/OC%	OP/OC4.63%
2	CG VAK Software & Exports Ltd.	18.61%	16.96%
3	E-Zest Solutions Ltd.	9.79%	8.24%
4	ICRA Techno Analytics Ltd.	14.60%	10.05%
5	Mindtree Ltd. (Seg.)	20.23%	18.53%
6	Persistent Systems Ltd.	33.86%	32.08%
7	R S Software (India) Ltd.	17.48%	16.96%
8	Sasken Communication Technologies	11.82%	11.02%
9	Thirdware Solution Ltd. (Overseas	33.47%	32.17%
	Average	19.05%	16.74%

10. As can be seen from the above, adjusted OP/OC was taken at 16.74%. Accordingly, ALP of the international transactions was computed by the TPO as under:

Particulars	Amount (in
Operating Cost (A)	2,168,915,373
Arm’s Length Margin (OP/OC) (%) (B)	16.74%
Arm’s Length Operating Profit (C=A*B)	363,076,433
Arm's Length Operating Revenue (D=A+C)	2,531,991,806
Actual Operating Revenue of the Assessee	2,329,404,391
Difference (D-E)	202,587,415
Proposed Adjustment u/s 92CA	202,587,415

11. The assessee objected to the comparables before the DRP but without any success. However, the DRP directed the TPO to treat the foreign exchange loss/gain as operating income.

12. The final set of comparables as per the directions issued by the DRP were taken as under:

Sr. No	Company Name	OP/OC (%)	Adj. OP/OC
1.	Acropetal Technologies Ltd.	14.02	7.07
2.	CG VAK Software & Exports Ltd.	20.75	19.10
3,	E-Zest Solutions Ltd.	10.93	9.37
4.	ICRA Techno Analytics Ltd.	17.30	12.75
5.	Mind tree Ltd. (Seg.)	18.18	16.52
6.	Persistent System Ltd.	29.66	27.97
7.	R S Software (India) Ltd.	17.40	16.88
8.	Sasken Communication Tech. Ltd.	3.18	3.18
9.	Thirdware Solution Ltd.	26.00	24.79
10,	Akshy Software Technology.	8.17	7.81
	Average	16.56%	14.46%

13. And finally, the ALP was determined as under:

Particulars	Amount in Rs.
Operating Cost (A)	2168915373
Arm’s length margin (%) (B)	14.46%
Arm’s length margin (Rs.) (C=A*B)	313625163
Arm’s length Revenue (D=A+C)	2482540536
Actual Operating Revenue of assessee (E)	2366732826
Difference between ALP and actual Operating Revenue of the Assessee (F=D-E)	115807710
Proposed Adjustment u/s 92CA	115807710

14. The first bone of contention is the inclusion of the following comparables in the final list of comparables:

1. ICRA Techno Analytics Ltd

2. Persistent Systems Ltd.

3. Thirdware Solutions Ltd.

15. Before us, the ld. counsel for the assessee vehemently objected to the inclusion of the aforesaid comparables. It is the say of the ld. counsel for the assessee that all these comparables have different functional profiles and, therefore, should not be accepted as proper comparables.

16. Per contra, the ld. DR, relying upon the orders of the lower authorities, strongly contended that the final list of comparables are good comparables with similar functional profiles and, therefore, have been rightly taken by the lower authorities.

17. We have carefully considered the objections raised by the ld. counsel for the assessee and the submissions made by the ld. DR. We will now consider each comparable one by one as under.

ICRA Techno Analytics Ltd

18. The Annual Report of ICRA is exhibited at pages 917 to 1037 of the paper book Volume II. We find that this company operates as full- fledged risk taking Entrepreneur and is engaged in the software development and consultancy engineering services, web development and hosting and subsequently, diversified itself into the domain of business analytics and business process outsourcing. This can be found from the significant accounting policies at page 958 of the paper book. Surprisingly, this company was not selected by the TPO in assessee’s own case in assessment years 2009-10 and 2012-13. Moreover, this company was excluded from the comparables by the co-ordinate bench in the case B.C. Management Services Private Limited Vs. DCIT in ITA No. 1064 & 1083 of 2017. The reasons for exclusion were functional dissimilarities and that segmental data was unavailable. We find that there is no change in the facts of this company for assessment year 2013-14 as well.

19. We further find that under the head ‘Revenue Recognition’, which is at page 959 of the paper book, the Revenue from services consists of revenue earned from services performed for software development and consultancy, licensing and sub-licensing fee, annual maintenance charges for software support, web development and hosting which is recognised to the extent services are performed and revenue from sales is recognised as and when delivery of the branded software is made and is booked after a discount. Considering the functional profile of this company and in the absence of segmental data, we are of the considered opinion that this company is not a good comparable and accordingly, direct for exclusion of this company. The assessee succeeds on this count.

Persistent Systems Ltd

20. The Annual Report of this company is exhibited at pages 607 to 810 of the paper book Volume –II. We find that this company also operates as full- fledged risk taking Entrepreneur. The Company’s operations predominantly relate to providing software products, services and technology innovation covering full life-cycle of products to its customers. We find that the primary reporting segments are identified based on review of market and business dynamics, based on risk and returns affected by the type or class of customers for the services provided which are as follows:

a. Telecom and Wireless

b. Life science and Healthcare

c. Infrastructure and System

21. This can be seen from the notes forming part of financial statements under the segment ‘Information’ at page 776 of the paper book. However, the segmental information of the Revenue from software development services and products is not available. From page 768 of the paper book, we find that this company owns intangibles of Rs. 240.480 crores comprising of software and acquired contractual rights. These intangibles comprise of 8.35% of net fixed assets. From page 787 of the paper book, we find that pursuant to the scheme of Amalgamation sanctioned by the Hon'ble High Court of Bombay vide order dated 3.2.2012, Persistent E Business Solutions and Persistent Systems and Solutions Limited, subsidiaries of the this company have been merged with this company w.e.f 1.4.2011 by which the assets and liabilities, right and obligations of erstwhile subsidiaries have been vested with this company effective from 1.4.2011.

22. This company has been rejected as a comparable by the Tribunal in assessee’s own case in assessment year 2010-11 in ITA Nos 609 and 168/DEL/2015. The relevant finding of the Tribunal is at para 49 of its order which reads as under:

 “49. The taxpayer sought exclusion of Persistent on ground of functional dissimilarity being a software product company having significant IPs and earning its revenue from its monetization, having intangibles in the nature of software licenses.

50. When we examine profit & loss account for the year ending March 31, 2010 of Persistent, available at page 1848 of the Paper Book - IV, it shows that the substantial income of Persistent is from sale of software services and products and has earned its revenue from sale of licensing of products and royalty. For ready perusal, revenue recognition of Persistent, available at page 1858, is extracted as under :-

ITA No.168/Del./2015

"H. Revenue recognition Revenue is recognised to the extent it is probable that the economic benefits will flow to the Company an revenue can be reliably measured.

I. Income from software services Revenue from time and material engagements is recognised on time basis in accordance with the terms contracts.

In case of fixed price contracts, revenue is recognised based on the milestones achieved as specified in the contracts on proportionate completion basis.

Revenue from licensing of products is recognised on delivery of products.

Revenue from royalty is recognised on sale of products in accordance with the terms of the relevant agreement.

Revenue from maintenance contracts are recognised on a pro- rata basis over the period of the contract as and services are rendered.

Unbilled revenue represents revenue recognised in relation to work done on time and material projects and price projects until the balance sheet date for which billing has not taken place.

Unearned revenue represents the billing in respect of contracts for which the revenue is not recognised as per the terms of contract."

51. It is also proved that Persistent is having huge intangible in the nature of software license.

52. Hon'ble Delhi High Court in case of Cashedge India Pvt. Ltd. (supra) upheld the exclusion of Persistent from the list of comparables vis-à-vis Cashedge India Pvt. Ltd. on the ground that Persistent is involved in software development, software products and marketing and its segmental data is not available.

ITA No.168/Del./2015

53. Coordinate Bench of the Tribunal in case of NEC Technologies India Ltd. vs. DCIT in ITA No.1102/Del/2015 for AY 2010-11 order dated 27.10.2017 examined the comparability of Persistent vis-à-vis NEC Technologies Ltd. which was into providing software development services and ordered to exclude Persistent by returning following findings :-

"22. Furthermore when we examine annual report of Persistent, available at pages 120 to 209 of the paper book, relevant pages 170 to 173, it is amply clear that Persistent deals in software products and earned its income both from software services and product whereas the taxpayer deals in software services and as such cannot be compared with Persistent for benchmarking the international transaction.

23. In view of what has been discussed above, we direct to exclude Persistent from final set of comparables for benchmarking the international transaction."

54. In view of what has been discussed above, we are of the considered view that Persistent having a different business model with no segmental data available and having huge intangibles is not a valid comparables vis-à-vis the taxpayer which is a routine captive software development service providers, hence ordered to be excluded.”

23. Considering the business profile of this company and in the light of findings of the co-ordinate bench, we direct for exclusion of this company from the final list of comparables. The assessee succeeds on this count.

Thirdware Solutions Limited

24. The Annual Report of this company is exhibited at pages 811 to 916 of the paper book Volume –II. The Company is engaged in the business of Information Technology and Information Technology enabled services. The company caters to both domestic and international markets. A perusal of the Annual Report shows that segmental information of the revenue from information technology and information technology enabled services is not available. From page 882 of the paper book, we find that the revenue recognition policy is that Revenue from Subscription contract is recognised on acceptance or renewal of the contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications is recognised on e-delivery of Software Licence Key to end user. This company has intangibles worth Rs. 108.22 crores.

25. We further find that this comparable has been rejected by the Tribunal in assessee’s own case in assessment year 2010-11 in ITA No. 609/DEL/2015 and the relevant finding is given at page 1644 Volume IV. Considering the functional profile of this company in the light of the finding of the co-ordinate bench [supra], we direct for exclusion of this company from the final list of comparables.

26. Second bone of contention relates to the following comparables which were included by the assessee and excluded by the TPO:

a. Cigniti Technologies Ltd.

b. Caliber Point Business Solutions Ltd

c. R. Systems International Ltd.

27. The ld. counsel for the assessee pointed out that these companies are good comparables and have been wrongly rejected by the TPO. It is the say of the ld. counsel for the assessee that these companies are functionally comparable and should be included in the final list of comparables.

28. The ld. DR strongly objected to this and stated that the same have been rightly rejected by the TPO. We will now consider the comparables one by one.

Cigniti Technologies Ltd.

29. The Annual Report of this company is exhibited at pages 1038 to 1142 of the paper book Volume –II. This company is mainly engaged in the software verification and testing services which is functionally part of software development services and it passes the filters applied by the TPO. Surprisingly, we find that in assessment year 2012-13, the TPO in its order dated 20.10.2016, framed u/s 92CA(3) of the Act has himself accepted this company as an appropriate comparable as can be seen from page 8 of his order. Facts and business profile of this company remains same as that of the appellant and since there is no change, we are of the considered opinion that this company should also be taken as an appropriate comparable for this year also. We, accordingly, direct for inclusion of this company.

Caliber Point Business Solutions Ltd

30. The Annual Report of this company is exhibited at pages 1143 to 1169 of the paper book Volume –II. The segmental information as per Annual Report – reportable segments are described as –

 (a) BPO activities which represent process management, outsourcing and transitioning services and others –

 (b) represent software support, maintenance and consulting related activities.

31. The other segment is functionally comparable to the appellant. We find that the Tribunal in assessee’s own case in assessment year 2010-11 in ITA No. 609/DEL/2015 has considered the inclusion of this company. The relevant finding of the co-ordinate bench reads as under:

“The taxpayer sought inclusion of R. Systems on the ground that it is functionally similar. The TPO has excluded R. Systems on the sole ground that its financial year is calendar year and also on the ground that data for the quarter ending December 2009 was unaudited and as such quarterly result shall not be considered.

61. Identical issue has been decided by Hon'ble High Court of Punjab & Haryana High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. in ITA No.101 of 2015 (O&M) order dated 24.08.2016, available at page 2628 of Paper Book - V, relevant page 2637, which has been decided in favour of the assessee by returning following findings :-

"27. The TPO excluded the case of R. Systems International Limited from the list of comparables. The ITAT included the same. The TPO excluded the case of R. Systems International Limited on the ground that it follows the calendar year i.e. Ist January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The TPO followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013-TII-68-ITATMUM-TP in which it had been held that a ITA No.168/Del./2015 company with a different financial year ending cannot be compared.

28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.

29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009.

30. This view is not contrary to Rule 10(B)(4) which reads as under:-

"10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into".

31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available.

ITA No.168/Del./2015

32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B."

62. So, following the findings returned by Hon'ble High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra), we are of the considered view that when data for the financial year is available, the comparable cannot be rejected merely on the ground that financial year followed is different. So, this issue is remitted back to the TPO to decide afresh in the light of the judgment in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra) by providing an opportunity of being heard to the taxpayer. CG VAK SOFTWARE & EXPORTS LTD. (CG VAK)

32. Respectfully following the same, we direct accordingly.

R. Systems International Ltd.

33. In the very same order [supra], the co-ordinate bench has given similar direction for this company also. For similar reasons, as given for comparable Caliber Point Business Solutions Limited, we direct accordingly.

34. The next grievance relates to the rejection of the appellant’s claim for risk adjustment.

35. We find that similar dispute arose in assessment year 2010-11 also and the Tribunal in ITA No. 609/DEL/2015 has considered the same vide Ground No. 12 which is as under:

“17. Assessee claimed risk adjustment on account of differences between the assessee and comparable companies which has been denied by TPO/DRP on the ground that the assessee has only a single customer risk. Assessee claimed risk adjustment of 13.89% to be applied to the margin of the comparable companies for bench marking the international transaction computed as under :

ITA No.168/Del./2015 Particulars Margin (in %) Rate of return on 5 year Government securities as 7.25% on March 2010 (A) Credit spread between 5 year Government 1.17% securities and AAA rated corporate bond as on 31 March 2010 (B) Rate of return on AAA rated corporate bonds C = 8.42% (A + B) Risk Adjustment to be made on margin earned by 13.89% comparables (B/A)

18. Assessee relied upon Rule 10B (2) and decision rendered by Delhi Bench of the Tribunal in Hyundai Rotem Company vs. ACIT in ITA No.510/Del/2016 order dated 22.11.2017 available at pages 2667 to 2680 of Vol.V of the paper book, relevant page 2678.

19. Ld. DRP rejected the claim of the assessee for risk adjustment on the ground that the mechanical adjustment cannot be made to the margin of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Ld. DRP further stated that this exercise requires robust and reliable data available with the assessee as well as for the comparables and in the absence of which, risk adjustment cannot be considered for enhancing comparability and thereby rejected the objection. Finding of the ld. DRP shows that the ld. DRP has not denied the risk adjustment but requires robust and reliable data to quantify the risk adjustment. It is settled principle of law that ITA No.168/Del./2015 claim cannot be rejected merely on the ground that it cannot be quantified.

20. Coordinate Bench of the Tribunal in case cited as Hyundai Rotem Company vs. ACIT (supra) decided the issue in favour of the assessee by returning following findings :-

"18. Ld. DRP for the Revenue contended that the risk has to be explained in case of each comparable and economic analysis cannot be the basis for risk adjustment in the absence of complete data provided by the taxpayer. However, the ld. AR for the taxpayer contended that the risk adjustment is required to be given on each comparable as has been held by the coordinate Bench 'A', Pune Bench of the Tribunal in case of Honeywell Turbo Technologies (India) Pvt. Ltd. vs. DCIT in ITA No.2584/PUN/2012 order dated 10.02.2017 by following the case of Sony India Pvt. Ltd. cited as 114 ITD 448 by making following observation:-

"33. Further, the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed when computed @ 20%. We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee."

19. Similar view has been taken by the coordinate Bench of the Tribunal in case of ITO vs. M/s. Supportsoft India Pvt. Ltd. in IT (TP) A.No.1372/Bang/2011 order dated 28.03.2013 by returning following findings :-

"27. Having heard both the parties and having considered the rival contentions, we find that the Tribunal in the case of M/s. Intellinet Technologies India Pvt. Ltd. vs. ITO in ITA 1237/Bang/2007 dated 30-3-2012 has considered this contention of the assessee and has held that the single customer risk attributable to the assessee is only an anticipated risk whereas the risk attributed by the ITA No.168/Del./2015 assessee to the comparables is existing risk and in such situation the TPO ought to have given the risk adjustment to the net margin of the comparable for bringing them on par with the assessee-company. In the said case also, the assessee had claimed risk adjustment at 5.5% and the Tribunal has directed the TPO to consider the contention of the assessee and decide the percentage on risk adjustment to be made in accordance with law. As both of us are Signatories to the said order, we respectfully following the decision in the case of M/s.Intellinet Technologies India Pvt. Ltd. (supra) remit this issue also to the file of the AO/TPO for re-consideration of the issue in accordance with law and in the light of our observations above."

20. So, following the decision rendered by coordinate Bench of the Tribunal in case of M/s. Support soft India Pvt. Ltd (supra), we are of the considered view that the taxpayer in this case is entitled for risk adjustment to the net margin of comparables for bringing them at par with the taxpayer. So, ground no.4 is determined in favour of the assessee.

21. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that the assessee is entitled for risk adjustment to the net margin of the comparables for bringing them at par with the taxpayer on supplying the complete data by the assessee. So, ground no.12 is determined in favour of the assessee for statistical purposes.”

36. As there is no difference in the facts for the year under consideration also, respectfully following the findings of the coordinate bench [supra] we direct accordingly.

37. In the result, the appeal filed by the assessee in ITA No. 4434/DEL/2018 is allowed in part for statistical purposes.

The order is pronounced in the open court on 26.09.2018.

 

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