DCIT, BANGALORE vs. M/S CISCO DEVELOPMENT (I) PVT. LTD.,, BANGALORE

IT(TP)A.308/Bang/2016 & CO.09/Bang/2017 Page - 2 r.w,s.144C(13) of the IT Act, dt.30.12.2015, in pursuance to the directions of the DRP, for the assessment year 2011-12.

The Ld. DR had drawn our attention to the order passed by the DRP, more particularly to para 6.1.4 with respect to the working capital adjustment and ground 2.3 of the DRP order where the DRP directed the AO to consider the foreign exchange fluctuation in respect of the assessee company as well as the comparable company as operating in nature, wherein the DRP has observed as under :

The Ld. AR in respect of ground.1 relied on page 94 of the paper book to submit that this year is the first year of business and there was no transaction for the previous year and hence forex gain/ loss arose to the assessee was for the assessment year under consideration.

With respect to ground.2, it was submitted that the TPO has worked out the working capital adjustment after taking the mean of six comparables as per the TP order para 7, wherein the working IT(TP)A.308/Bang/2016 & CO.09/Bang/2017 Page - 5 capital adjustment was worked out at 18.06%. It was the case of the Ld. AR that the details of the working capital adjustment were given and based on said details working capital adjustment was worked out by the assessee in respect of the companies, namely Crisil Risk & Infrastructure Solutions Ltd, ICRA Management Consulting Services Ltd, KITCO Ltd, Wapcos Ltd, It was submitted that the contention of the Ld. DR that the details of working capital adjustment were not given , was factually incorrect. In the light of the above it was submitted that the matter may be remanded back to the DRP with a direction to work out the working capital adjustment on the basis of ground 6 in appeal before the DRP.

We have heard the rival contentions and perused the material on record. Firstly we will deal with forex fluctuation. In this regard, reliance of Ld. DR on Mercedez Benz R & D India P. Ltd (supra), wherein at para 6.2.1 had recorded the finding that if the forex gain / loss is operational in nature as long as it pertains to assessment year under consideration and is having nexus with export / import of the particular year than the same is required to be treated as operative in nature. In our view this proposition of law held by the coordinate bench, though correct, will not be applicable in the facts of the present case as the assessment year under consideration was the first year of operation and therefore there cannot be any question of carry forward of forex gain / loss of the previous year to the AY under consideration . Accordingly the finding recorded by the AO, on account of peculiarity of the present IT(TP)A.308/Bang/2016 & CO.09/Bang/2017 Page - 6 case, is incorrect. However as noted by the Tribunal in the matter of Mercedes Benz (supra), only the forex gain / loss which are relevant to the assessment year under consideration and are having nexus between export / import in the assessment year are required to be taken into account. In view of the above, ground.1 of the Revenue is dismissed.

Ground no.2 of revenue appeal and Ground no.6 of the cross objection deals with working capital adjustment. If we look into the order of the DRP, it is clear that the DRP had calculated the working capital adjustment by taking the OP /OC mean at 19.6%. However it was directed to take at 18.06% on the assumption that it will take care of the working capital adjustment. We are at a loss to understand as to how, once the working capital adjustment details are given in the annexure-6 of the grounds of appeal of DRP how the DRP can pass order in adhoc/ lump sum manner. It is the duty of the lower authorities to arrive at actual calculation of working capital adjustment and then grant working capital adjustment , when detailed working is given by the assessee, and lump sum or exgatia grant of working capital adjustment is not expected from a specialised authority, viz., DRP. In view of the above, this ground of working capital is remanded back to the file of DRP with a direction to recompute the working capital adjustment based on the details furnished by the assessee in Annexure -6 to grounds of appeal. Needless to say that DRP while doing so shall give opportunity of being heard to the assessee and pass a detailed order.

The ground nos.1 and 2 are not pressed being general in nature.

Ground no.3 is in support of the order of the DRP which we have already decided in ground no.1 of the Revenue appeal in IT(TP)A.308/Bang/2016, therefore, no separate adjudication is required.

Ground no.4 pertains to exclusion of Kitco Ltd and Wapcos Ltd, as comparables based on unreasonable comparable criteria., while ground no.5 pertains to inclusion of Tata Services Ltd and Telecommunication Consultants India Ltd. In this regard, the Ld. AR had submitted that there was material available on record of the lower authorities however , at the time of the proceedings before the lower authorities, the assessee has not raised ground pertaining to exclusion / inclusion of these comparables. It was submitted that in the cross objection the assessee may be permitted to take all these objections.

In response the Ld. DR as submitted that it is the duty of the assessee to take the objection at the appropriate stage and the assessee should not be permitted to raise these objections before the ITAT.

We have heard the rival submissions and perused the material on record. Undoubtedly the material pertaining to all these four comparables are available with the lower authorities and no fresh material is required to be furnished by the assessee. In view of the IT(TP)A.308/Bang/2016 & CO.09/Bang/2017 Page - 9 above, admit the ground nos.4 and 5 of cross objection and remand these grounds to the file of DRP for denovo examination taking into consideration the FAR analysis and taking into account various filters as applied by the TPO. Needless to say while deciding afresh the DRP shall grant opportunity of hearing to the assessee and shall also consider the material and submissions, if any, made by the assessee in this regard. In the result the ground nos.4 and 5 of cross objection are allowed for statistical purposes.

Ground no.6 of the cross objection had already been considered by the Tribunal while deciding the ground no.2 of the Revenue’s appeal.

Ground no.10 of the cross objection deals with risk adjustment on account of the difference in risk profile of the assessee and the comparables. The Ld. AR had drawn our attention to para 2.6, at page 8 of the DRP. Our attention was drawn to Annexure 5B to the grounds of appeal raised before the DRP and it was submitted that the assessee had provided the working of the risk management and the order passed by the DRP. The assessee has not brought on record how the difference in functional profile and risk as annexed, the result is wholly incorrect. He has drawn our attention to Annexure 9 at page 38 of the paper book, where the details as a risk assumed by the assessee vis-a-vis comparables were given. The assessee had also relied on various decision mentioned in Annexure 9.

On the other hand the Ld. DR relied upon the decision of Mercedez Benz (supra) for the purpose of risk adjustment.

We have heard the rival contentions and perused the material on record. Undoubtedly the finding recorded by the DRP at para 2.6 at page 8 is factually in contradictions with the grounds and Annexure 9 filed before the DRP where elaborate details were given by the assessee for claiming the risk adjustment. Further the DRP for the reasons best known had not considered the same and held that the assessee had not brought in any details entitling it for risk adjustment. In view of the above and in view of the finding recorded by the Tribunal in Mercedez Benz (supra) in para 7.3.2, to the following effect : 7.3.2 The Bangalore Benches of the Tribunal, while allowing risk adjustment to captive service providers, as a matter of principle has held in many cases, ;including the one cited (supra), that risk adjustment cannot be granted unless the assessee has submitted computation of the same before the authorities below. In the case on hand, we find that though the assessee in Form 35A submitted before the DRP, at Annexure/Objection 13 thereof, mentioned risk adjustment at 4.92%, no scientific basis or working in respect of the assessee's claim vis-à-vis the comparable companies had been provided. Even on pages 890 & 891 of paper book (Annexure 9-B), no working has been given in respect of risk adjustment claimed at 6.26% vis-à-vis the comparable companies. Since the assessee has not given the computation of risk adjustment of the assessee vis-à-vis the comparable companies, we hold that the assessee shall not be entitled to any risk adjustment and accordingly reverse the DRP's decision granting the assessee risk adjustment. In coming to this view, we place reliance on the decision of the co-ordinate bench of this Tribunal in the case of Syniverse Teledata Systems (P.) Ltd. (supra) which covers the issue squarely in favour of the revenue in the light of the factual matrix of the IT(TP)A.308/Bang/2016 & CO.09/Bang/2017 Page - 11

In the result, cross objection filed by the assessee is partly allowed for statistical purposes and the appeal filed by the Revenue is partly allowed for statistical purpose.