IN INCOME TAX APPELLATE TRIBUNAL, BENCH- A, BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SHRI S JAYARAMAN, ACCOUNTANT MEMBER IT(TP)A No.57/Bang/2015 (Asst. Year 2010-11) Dy. Commissioner of Income-tax, Circle-1(1)(1), Bangalore. . Appellant Vs. M/s Aruba Networks India Pvt. Ltd., Bangalore. . Respondent CO No.81/Bang/2015 (Asst. Year 2010-11) M/s Aruba Networks India Pvt. Ltd., Bangalore. . Appellant Vs. Dy. Commissioner of Income-tax, Circle-5(1)(2), Bangalore. . Respondent Revenue by : Dr. PK Srihari, Addl. CIT Assessee by : Shri Padam Chand Khincha, CA Date of Hearing : 25-7-2016 Date of Pronouncement : 30-9-2016 IT(TP)A No.57 & 81/B/15 2 ORDER PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER: This appeal by assessee is directed against order of Commissioner of Income-tax (Appeals) IV, Bangalore dated 12/11/2014 and it pertains to assessment year 2010-11. CO No.81/Bang/2015 2. assessee has raised following grounds of appeal. Ground on comparables retained/confirmed by TPO and CIT(A) 1. learned TPO and learned CIT(A), Bangalore has erred in selecting/confirming selection of comparables viz., ICRA Techno Analytics Ltd (seg.) and Kals Information Systems Ltd (seg.) for computation of arms length price. On facts and circumstances of case and law applicable, aforesaid companies should be excluded from lists of comparables. 2. learned TPO has erred in treating foreign exchange gain or loss as non - operating in nature in computing operating margin of (i) comparables and (ii) assessee. On facts and in circumstances of case and law applicable, IT(TP)A No.57 & 81/B/15 3 foreign exchange gain or loss should be considered as operating in nature in computing operating margin of (i) comparables and (ii) assessee. Ground on working capital adjustment 3. learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing adjusted margin of comparables. On facts and circumstances of case and law applicable, working capital adjustment is to be properly computed and allowed in computing adjusted margin of comparables. Ground on risk adjustment 4. learned TPO and CIT(A) has erred in not allowing risk adjustment in computing adjusted margin of comparables. On facts and circumstances of case and law applicable, risk adjustment is to be properly computed and allowed in computing adjusted margin of comparables. Ground on inappropriate computation of operating margin of comparables and assessee IT(TP)A No.57 & 81/B/15 4 5. learned TPO has erred in not properly computing operating margin of comparables and assessee. On facts and in circumstances of case and law applicable, operating margin of comparables and assessee is to be properly computed. Marketing Support Services Segment Ground of TP adjustment 6. learned TPO has erred in making TP adjustment in respect of marketing support segment amounting to Rs. 27,76,160/- and learned CIT(A) has erred in confirming said TP adjustment remaining after allowing working capital adjustment. Ground on comparables selected/confirmed 7. learned TPO has erred in selecting companies viz., Asian business Exhibition & Conferences Ltd., HCCA Business Services Ltd., Hindustan Housing Co. Ltd., Killick Agencies and Mktg. Ltd and Priya International Ltd for computation of arms length price. On facts and circumstances of case and law applicable, aforesaid companies should be excluded from list of comparables. IT(TP)A No.57 & 81/B/15 5 Ground on treating foreign exchange gain or loss as non-operating in nature 8. learned TPO has erred in treating foreign exchange gain or loss as non-operating in nature in computing operating margin of (i) comparables and (ii) assessee. On facts and in circumstances of case and law applicable, foreign exchange gain or loss should be considered as operating in nature in computing operating margin of (i) comparables and (ii) assessee. Ground on working capital adjustment 9. learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing adjusted margin of comparables. On facts and circumstances of case and law applicable, working capital adjustment is to be properly computed and allowed in computing adjusted margin of comparables. Ground on risk adjustment 10. learned TPO and CIT(A) has erred in not allowing risk adjustment in computing adjusted margin of comparables. On facts and circumstances of case and law applicable, risk adjustment is to be properly computed and allowed in computing adjusted margin of comparables. IT(TP)A No.57 & 81/B/15 6 Ground on inappropriate computation of operating margin of comparables and assessee 11. learned TPO has erred in not properly computing operating margin of comparables and assessee. On facts and in circumstances of case and law applicable, operating margin of comparables and assessee is to be properly computed. Prayer 12. In view of above and other grounds to be adduced at time of hearing, respondent prays that order of learned CIT(A) to extent prejudicial to respondent be quashed or in alternative aforesaid grounds of cross objections be accepted and relief be allowed accordingly. 3. M/s Aroba Ltd is subsidiary of Aroba Wireless Network Incorporated USA. It is engaged in providing software development and support services to its AE. 4. following are details from international transactions of Assessee. IT(TP)A No.57 & 81/B/15 7 1) Income from software development services amounting to Rs.15,74,03,549/-. 2) Income from providing marketing services amounting to Rs.2,06,39,290/- 3) Purchase of capital asset amounting to Rs.2,40,16,114/- 5. assessee adopted TNMM at entity level, whereas TPO adopted TNMM segment level. operating costs of assessee in software services was 14.39% and in marketing services was at 10.00%. Software Services 6. operating cost of comparables for software services was at 22.71%. comparables selected by assessee for TP stated is follows. Sl.No. Name of Company Operatiang Margin on Cost 1 Axis IT and T Ltd 8.80% 2 Blue Staar Infotech Ltd 10.82% 3 California Software Co. Ltd 9.43% 4 Cambridge Technology -7.32% Enterprises Ltd 5 Goldstone Technologies Ltd 3.76% 6 ICRA Techno Analytics Ltd 24.92% 7 Mindtech (India) Ltd -1.48% 8 Mindtree Wireless Pvt Ltd. 24.39% 9 Nucleus Software Exports Ltd. 18.43% IT(TP)A No.57 & 81/B/15 8 10 RS Software (India) Ltd 7.89% 11 R Systems International Ltd 2.56% 12 Saksoft Ltd 9.38% 13 Sonata Software Ltd. 28.92% 14 Thinksoft Global Services Ltd 16.96% 15 Aditya Birla Minacs IT -5.11% Services Ltd 17 Bristlecone India Ltd -2.12% 18 CG VAK Softwaare and -16.20% Exports Ltd 19 Sagarsoft (India) Ltd -1.33% 20 Sunderam Infotech Solutions -8.34% Ltd Average of Mean 6.55% Less: Working Capital 4.88% Adjustment Adjusted Average Mean 1.67% Ground No. 1 of CO are dealt with hereunder: 7. comparables selected by TPO in order u/s 92CA are as follows: Sl.No. Name of Operating W.cap Company Margin on adjusted Cost Maragin 1 ICRA Techno 24.94% 23.79% Analytics Ltd. (seg) 2 Infosys Ltd. 44.98% 43.79% 3 Kals Information 34.41% 29.54% Systems Ltd. (seg) 4 Larsen & Toubro 19.33% 18.53% Infotech Ltd. 5 Mindtree Ltd. (seg) 14.83% 11.87% 6 Persistent Systems & 15.38% 14.28% Solutions Ltd. 7 Persistent Systems 30.335% 27.20% Ltd. 8 RS Software (India) 10.29% 9.59% Ltd. 9 Sasken 17.36% 15.52% Communication IT(TP)A No.57 & 81/B/15 9 Technologies 10 Tata Elexi (seg) 20.93% 16.32% 11 Thinksoft Global 17.05% 13.10% Services Ltd. Arithmetic Mean 22.71% 20.32% Computation of arm s length price by TPO and adjustment made: Arm s length mean margin 22,71% Less: Working capital adjustment 1.98% Adjusted mean margin after working 20.73% capital adjustment Operating Cost (A) 13,75,90,785 Arm s length price 120.73% of operating 16,61,13,355 cost (B) Total operating Revenue 15,74,03,549 Short fall being Adjustment u/s92CA (B- 87,09,806 C) 8. TPO has computed working capital adjustment at 2.39%. TPO has contended that there must be upper cap for adjustment to be given. Hence working capital adjustment is restricted to 1.98% and adjusted mean margin is computed at 20.73%. 9. CIT(A) observations with respect to software development segments is as follow. IT(TP)A No.57 & 81/B/15 10 CIT(A) Observation (Software Development Segment) SL. Name of Company Sales Operating Adjusted CIT(A) Order No (Rs. Margin on Cost Operating . In Margin on crores Cost 1 ICRA Techno 11.89 24.94% 23.79% Accept Analytics Ltd. (seg) 2 Infosys Ltd. 21,14 44.98% 43.79% Reject 0.00 3 Kals Information 2.16 34.41% 29.54% Accept Systems Ltd(seg) 4 Larsen & Toubro 1,776. 19.33% 18.53% Reject Infotech Ltd. 76 5 Mindtree Ltd (seg) 698.0 14.83% 11.87% Reject 2 6 Persistent Systems & 6.67 15.38% 14.28% Accept Solutions Ltd 7 Persistent Systems 504.4 30.35% 27.20% Reject Ltd. 1 8 RS Software (India) 161.8 10.29% 9.59% Accept Ltd 3 9 Sasken 401.5 17.36% 15.52% Reject Communication 0 Technologies 10 Tata Elexi (seg) 336.9 20.93% 16.32% Reject 4 11 Thinksoft Global 74.55 17.05% 13.10% Accept Services Ltd 10. Remaining companies after rejection by CIT (A) is : Remaining Companies After CIT(A) Rejection Sl.No. Name of Sales(Rs.in Operating Adjusted Company crores Maargin Operating on Csot Maargin on Cost 1 ICRA Techno 11.89 24.94% 23.79% Analytics Ltd.(seg) 2 KalsInformation 2.16 34.41% 29.54% IT(TP)A No.57 & 81/B/15 11 Systems Ltd. (seg) 3 Persistent 6.67 15.38% 14.28% Systems & Solutions Ltd. 4 RS Software 161.83 10.29% 9.59% (India) Ltd. 5 Thinksoft 74.55 17.05% 13.10% Global Services Ltd. Arithmetic 20.41% 18.06% Mean 11. With respect to comparables numbering 5 by CIT(A), learned counsel for assessee requested for ICRA Techno Analytics Ltd., (segment) and KALS Information Systems Ltd., (segment) are to be rejected. final comparables according to learned counsel for assessee would be as follows : Final Comparables Sl.No. Name of Company Operating Working Margin on capital Cost Adj.Margin 1 Persistent Systems & 15.38% 14.28% Solutions Ltd. 2 RS Software (India) 10.29% 9.59% Ltd. 3 Thinksoft Global 17.05% 13.10% Services Ltd. Arm s length margin 14.24% 12.32% IT(TP)A No.57 & 81/B/15 12 12. We heard both parties. 13. We find that decision in case of DCIT Vs M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, is held as follows. (1) ICRA Techno Analytics Ltd. (seg) 2. At outset, we note that apart from having related party revenue at 20.94% of total revenue, this company was also found to be functionally not comparable with software development services segment of assessee. DRP has given its finding at pages 13 to 14 as under:- Having heard contention, on perusal of annual report, it is noticed by us that segmental information is available for two segments i.e., services and sales. However, it is evident from annual report that service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, objection of assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude above company from comparables. IT(TP)A No.57 & 81/B/15 13 3. We find that facts recorded by DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then same cannot be regarded as functionally comparable with that of assessee who is rendering software development services to its AE. 4. In view of above facts, we do not find any error or illegality in findings of DRP that this company is functionally not comparable with that of pure software development service provider. 14. Respectfully following decision of co-ordinate Bench in case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from list of comparables selected by TPO/AO. 15. With respect to KALS Information Systems Ltd., we find that co-coordinate bench in case DCIT Vs. M/s Electronics for Imaging India Pvt, Ltd in ITA No.212/2015 for assessment year 2010-2011 has held as follows: IT(TP)A No.57 & 81/B/15 14 (3) KALS Information Systems Ltd. 5. assessee raised objections against this company on ground that this company is engaged in development of software and software products. Further, this company consists of STPI unit and also having training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, same cannot be considered as comparable with software development service providing company. 6. DRP has directed AO to exclude this company from list of comparables by taking note of fact that there were inventories in books of accounts of this company which shows that this company is in software product business. Further, by following decision of this Tribunal in case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of assessee. 7. We have heard ld. DR as well as ld. AR and considered relevant material on record. IT(TP)A No.57 & 81/B/15 15 ld. DR has not disputed fact that comparability of this company has been examined by this Tribunal in series of decisions including in case of Trilogy e-business Software India Ltd. (supra). We further note that in balance sheet of this company as on 31.3.2010, there are inventories of Rs.60,47,977. Therefore, when this company is in business of software products, same cannot be compared with pure software development services provider. Accordingly, we do not find any error or illegality in impugned findings of DRP. 16. Respectfully following decision of co-ordinate Bench in case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from list of comparables selected by TPO/AO. 17. Hence based on final list of comparable companies 3 in Nos. viz. Persistent Systems, RS Software, Think Soft, working capital adjustment comes to 1.92% which is lesser than 1.98 adopted by TPO. IT(TP)A No.57 & 81/B/15 16 18. appellant s margin for software division is as under:- Particulars Amount(INR) Operating Revenue as per TPO 15,74,03,549 Operating Cost as per TPO 13,75,90,785 Operating Profit 1,98,12,764 OP/OC 14,40% 19. Ground No.2 - relying on decision in case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature. 20. With respect to ground No. 3 working capital adjustment, CIT(A) has held that action of TPO in restricting working capital adjustment to 1.98% is correct. We find that 1.92% which comes out based on final list of comparables is lesser than 1.98% adopted by TPO. ld counsel for assessee requested that working capital adjustment should be given at actual based on final comparables. Reliance was placed on ITAT decision in ARM Embedded Technologies Pvt. Ltd., Vs. DCIT, TS-466-ITAT- IT(TP)A No.57 & 81/B/15 17 2015(Bang)-TP. Hence, we direct TPO to rework working capital adjustment. 21. With respect to 4, learned counsel also pointed out that price margins are without adjustment of risk differentials. learned counsel submitted that it should be granted adjustment and placed reliance on decision in case of M/s Intellinet Technologies India Pvt. Ltd., Vs. ITO in ITA No./1237/Bang/2007 and M/s Bearing Point Business Consulting Pvt. Ltd., in ITA No.1124/Bang/2011. 22. Ground No.5 is conceptual. 23. We find that appellant s margin is higher than average margin of comparables. Thus International Transaction of appellant relating to software development services should be considered to be at Arm s Length. Sales & Marketing Support Services Segment 24. Ground No.6 is conceptual. Ground No.7 is dealt as below: IT(TP)A No.57 & 81/B/15 18 25. comparables selected by TPO in order u/s 92CA for Sales Marketing and support services segment. 26. Comparables selected by TPO in Order u/s 92CA Sl.No. Name of Company Operating Margin on Cost 1 Asian Business Exhibition & 60.13% Conferences Ltd 2 Cyber Media research Ltd. 13.68% 3 HCCA Business Services 19.09% 4 Hindustan Housing Co Ltd 38.12% 5 ICC International Agencies Ltd., 13.72% 6 Killick Agencies & Mktg. Ltd. 17.36% 7 Priya International Ltd 11.47% Arithmetic Mean 24.80% 27. Computation of arm s length price by TPO and adjustment made: Aram s length mean margin 24.80% Operating Cost (A) 1,87,62,380 Arm s length price 124.80% of operating 2,34,15,450 cost (B) Total operating Revenue (C) 2,06,39,290 Short fall being Adjustment u/s 92CA (B-C) 27,76,160 IT(TP)A No.57 & 81/B/15 19 28. Assessee has objected to comparables selected by TPO in following Chart. Margins as Appell- Reasons for rejection per TPO ant s stand Sl. Name of Company Operating Functio Other Other Note Margin on nally Reasons Cost dissimil ar 1 Asian Business 60.13% Reject a)Abnor 1 Exhibition & mally Conferences Ltd high margin and Abnorma l financial circumst ances 2 Cyber Media 13.68% Accept 2 Research Ltd.* 3 HCC Business 19.09% Reject Services 4 Hindustan Housing 38.12% Reject b) Fails Co Ltd RPT filter 5 ICC International 13.72% Accept Agencies Ltd., 6 Killick Agencies & 17.36% Reject c)Fails 3 Mktg. Ltd. RPT filter 7 Priya International Ltd 11.47% Accept 24.80% 29. learned counsel for assessee submitted as follows:- IT(TP)A No.57 & 81/B/15 20 30. Asian Business Exhibition & Conferences Ltd., should be rejected as it is functionally different from Appellant for following reasons: a. As per director report, company is engaged in business of organizing exhibitions and conference. b. As per profit and loss account, company has revenues from exhibitions & events, delegate fees, sponsorships and entry charges. c. As per significant accounting policies, company has revenues recognition policy for income from exhibitions & events, delegate fees, sponsorships and entry charges. 31. In view of ITAT decision in case of ACIT v RGA Services India Pvt. Ltd TS-580-ITAT-2015(mum)-TP AY 10-11 and DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under:- 8. However, we find that only effective ground raised by assessee in marketing support segment is regarding Asian Business Exhibition & Conference Ltd., comparable selected by TPO and retained by DRP. IT(TP)A No.57 & 81/B/15 21 9. assessee objected against this company on ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. DRP did not accept contention of assessee and held that this company received income in nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to functions carried out by assessee. 10. Before us, ld. AR of assessee has submitted that functional comparability of this company has been examined by Mumbai Bench of Tribunal in case of RGA Services India Pvt. Ltd. vide order dated 20.11.2015 in ITA No.22/Mum/2015 and submitted that Mumbai Tribunal has held that operation of organizing exhibition and events is not comparable with support services provided by assessee to its AE in respect of reinsurance and actuarial activities. Thus, ld. AR has submitted that this company cannot be considered as functionally comparable with he assessee s activity of providing sales and marketing services to its AE. 11. We have considered rival submissions and considered relevant material on record. As it is clear that assessee is providing sales and IT(TP)A No.57 & 81/B/15 22 marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and like, working also includes educating potential users of benefit and features of AEs range of products. However, products for which assessee is providing sales and marketing services is only software/information technology products. Therefore, Asian Business Exhibition & Conference Ltd. which is mainly engaged in organization of exhibitions and events as well as conducting conferences on behalf of various clients for their various products and businesses. functions of this company are entirely different from assessee who is providing sales and marketing support services to its AE for software/IT products. Mumbai Bench of Tribunal in case of RGA Services India Pvt. Ltd. (supra) while considering functional comparability of this company has held at paras 11 and 12 as under:- 11. We have considered submission of parties and perused relevant material on record. On perusal of order passed by TPO it is noticed that TPO while dealing with assessee s objection with regard to selection of Asian IT(TP)A No.57 & 81/B/15 23 Business Exhibition and Conferences Limited as comparable has admitted that nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, main operation is organizing exhibition and events. Further, schedule 12 of profit and loss account as well as notes to accounts reveals, revenue earned by company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that business model of assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE s, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be IT(TP)A No.57 & 81/B/15 24 considered as comparable to assessee. Therefore, for aforestated reasons DRP, in our view, was justified in excluding this company as comparable. As far as contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by DRP, we may observe, such argument of learned DR is not at all relevant as issue raised by department in present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as comparable. As far as objection of learned departmental representative that assessee itself has selected this company as comparable, we may observe, that cannot be sole criteria to reject assessee s objection with regard to selection of comparable. At time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at relevant time. However, if subsequently on basis of information available in public domain it is found on basis of IT(TP)A No.57 & 81/B/15 25 functionality or some other reason company is not at all comparable, assessee cannot be precluded from objecting to selection of company as comparable. This legal proposition is fairly well settled by decision in case of DCIT V/s. Quark Systems (P) Ltd. (2010)132TTJ(Chd)(SB)1 as well as decisions relied upon by counsel for assessee. In view of aforesaid, we do not find any infirmity in directions of DRP in excluding Asian Business Exhibition and Conferences Limited as comparable. ground raised is therefore dismissed. 12. In view of above facts as well as decision of Mumbai Bench of Tribunal, this company cannot be considered as good comparable with assessee. Accordingly, we direct AO/TPO to re-compute ALP in marketing support services segment by excluding Asian Business Exhibition & Conference Ltd. from comparables. IT(TP)A No.57 & 81/B/15 26 32. learned counsel submitted that HCCA Business Services is engaged in Payroll processing. Therefore this company is functionally different from Appellant and should be rejected. Reliance is placed on ITAT decision in case of DC IT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under: (1) HCCA Business Services Pvt. Ltd. 13. assessee objected against inclusion of this company in list of comparables on ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, assessee referred to Notes to Accounts wherein company s operations comprise of payroll processing services is mentioned and hence it is not possible to give quantitative details of sales and certain information separately. 14. DRP after considering annual report noted that except Note 2.14, there is no other observation in annual report from which it can be established that company is engaged in marketing and sales support services comparable to IT(TP)A No.57 & 81/B/15 27 assessee. Accordingly, DRP directed AO to exclude said company from comparables. 15. We have heard ld. DR as well as ld. AR and considered relevant material on record. DRP has considered fact that payroll processing services was main part of operations of company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in absence of any contrary fact on record brought before us, we do not find any reason to interfere with finding of DRP, when functions and business activity of this company was found to be different from marketing and sales support services of assessee. Accordingly, objection of Revenue is rejected. 33. Learned Counsel submitted that Hindustan Housing Co. Ltd. Should be rejected as it has substantial Related Party Transactions at 26.97% and hence fails RTP filter. 34. Learned counsel submitted that IT(TP)A No.57 & 81/B/15 28 Killick Agencies & Mktg. Ltd. Should be rejected as it is functionally different from Appellant for following reasons: a. Commission/service charges income of company constitutes 64.66% of operating revenues, which is less that 75% of operating revenue. No segmental results are available in annual report. b. This company is also involved in exports of micro switches, engineering items, acoustics items & head sets. Reliance is placed on ITAT decision in case of DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11. 35. Reliance is placed on ITAT decision in case of DC IT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under: (2) Killick Agencies & Marketing Ltd. 16. assessee objected against this company on ground that commission/service charges income of this company is Rs.2,19,00,000 out of operating revenue of Rs.3,39,00,000. Therefore, IT(TP)A No.57 & 81/B/15 29 commission/ service charges income constitute about 65% of operating revenue which is less than 75% of operating revenue filter applied by TPO. In absence of segmental results, this company was sought to be excluded from set of comparables. 17. DRP found that this company conducts business as agent of foreign principal and deal in maritime equipments. Further, receipts are mainly in nature of commission income and service charges. Therefore, this company was functionally dissimilar to that of assessee. 18. We have heard ld. DR as well as ld. AR and considered relevant material on record. 19. ld. DR has submitted that TPO has considered relevant information as reported in annual report of company and it was found that this company is acting as agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company IT(TP)A No.57 & 81/B/15 30 was found to be in business of marketing support services which is similar to assessee. 36. Also we find that RTP filter is substantial at 16.4% and hence following decision of 24/7 Customer.Com Pvt. Ltd., (Supra), we direct TPO to exclude this comparable. 37. Following co-ordinate bench decisions stated (Supra) we direct that TPO to exclude Asian Business Exhibition & Conferences Ltd., Cyber Media Research Ltd.,, HCCA Business Services Pvt. Ltd., Hindustan Housing Co. Ltd., and Killick Agencies & Marketing Ltd. 38. Hence final comparables in sales and support services segment which are to be retained are as follows. SN Name of Operating Margin on Company Cost as per TPO 1 Cyber Media 13.68% Research Ltd. 2 ICC International Agencies 13.72% Ltds., 3 Priya International Agencies 11.47% IT(TP)A No.57 & 81/B/15 31 Ltd., Arm s length margin 12.96% 39. We also direct that TPO to grant risk adjustment following decisions of coordinate bench in case of M/s Bearing Point Business Consulting Pvt. Ltd., in ITA No.1124/Bang/2011, wherein it has been held as follows:- IV. Risk adjustment: 5.5 According to assessee, it is operating in risk mitigated environment. It was submitted that risk assumed by it are lesser than those assumed by companies in uncontrolled condition, therefore, adjustment for risk is to be granted. reasoning for above submission is that higher risk, higher profit. 5.5.1 In instant case, TPO in his order has computed adjustment for risk differential Table at pages 179 and 180 of order passed u/s 92C of Act indicate margins were reduced by 0.73% to factor in risk differentials. TPO, however, after computing risk differentials did not give effect to same on premise that single customer IT(TP)A No.57 & 81/B/15 32 risk of assessee is more to off set effect of risk differentials as above. In this connection, earlier Bench of this Tribunal in case of M/s Intellinet Technologies India Pvt. Ltd v. ITO in ITA No.1237/Bang'2007 had, on similar issue, observed as under: Page 25 of 29 25 ITA No.1124/Bang/2011 "7.1 As seen from records, assessee had acquired business and also earned income out of said transaction by cost plus basis. Thus, it can be seen that assessee has not encountered risk of having single customer, whereas same cannot be said as regards comparables. As pointed out by learned counsel for assessee, comparables were dealing in open market and therefore, they were prone to marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard technical use by them. In such case, risk encountered by assessee cannot be said to be equivalent risks attached to comparables. risk attributed to assessee by TPO is anticipated risk whereas risk attributed by assessee to comparables is existing risk. In such situation, TPO ought to have given risk adjustment to net margin of IT(TP)A No.57 & 81/B/15 33 comparables for bringing them on par with assessee company..................". 5.5.2 In conformity with findings of earlier Bench (supra), we direct AO/TPO to work out suitable risk adjustment and compute ALP accordingly. 40. particulars for grant of risk differential is as follows: Particulars Amount (INR) Total Operating Revenue 2,06,39,290 Operating Cost as per TPO 1,87,62,380 Operating Margins 18,76,910 OP/OC 10.00% 41. Hence, we direct TPO to grant risk adjustment in light of decision of Bearing Point (Supra). 42. Ground No.9 TPO is directed to provide appropriate working capital adjustment for sales and marketing segment. 43. Ground No.8 - relying on decision in case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain IT(TP)A No.57 & 81/B/15 34 or loss should be considered as operating in nature for marketing support services. 44. Appellant s margin is within 5% range of average margin of comparables. Thus, international transactions of Appellant should be considered to be at arm s length. With these directions, we set aside issues to file of TPO to rework ALP. 45. Ground 11 is conceptual Ground No.12 is general. ITA No.57/Bang/2015 Revenue has raised following grounds of appeal: 1. order of CIT(A) is opposed to law and facts and circumstances of case. 2. CIT(A) erred in law as well as on facts in directing TPO on marketing support segment to IT(TP)A No.57 & 81/B/15 35 grant working capital adjustment under TNM methodology as per prevailing norms without appreciating that directions issued are beyond mandate of provisions of sec. 251(1)(a) of IT Act which does not empower CIT(A) to set aside issue. 3. CIT(A) erred in directing AO to follow ratio laid down by Hon ble Court in case of Tata Elxsi Ltd., 349 ITR 98 and exclude telecommunication expenses and other foreign currency expenses from total turnover also while computing deduction u/s 10A of IT Act, without appreciating fact that there is no provisions in section 10A that such expenses should be reduced from total turnover also, as clause (iv) of explanation to section 10A provides that such expenses are to be reduced only from export turnover also. 4. CIT(A) erred in not appreciating fact that jurisdictional High Court s decision in case of Tata Elxsi Ltd., 349 ITR 98 has not been accepted by department and appeal has been fixed before Hon ble Supreme Court. IT(TP)A No.57 & 81/B/15 36 5. For these and such other grounds that may be urged at time of hearing, it is humbly prayed that order of CIT(A) be reversed and that of AO be restored. 6. appellant craves leave to add, to alter, to amend or delete any of grounds that may be urged at time of hearing of appeal. 46. Ground No.1 is general. 47. Ground No.2 has already been decided in assessee s cross objection. 48. Ground No.3 and 4 are decided against Revenue in light of Hon ble Court s decision in case of Tata Elxsi Ltd., 349 ITR 98. 49. Ground No.5 and 6 are general. IT(TP)A No.57 & 81/B/15 37 50. In result, appeal is allowed for statistical purpose and Cross-objection is partly allowed. Order pronounced in open court on 30th September , 2016. Sd/- Sd/- (S JAYARAMAN) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : 30/09/2016 Vms Copy to :1. Assessee 2. Revenue 3.The CIT concerned 4.The CIT(A) concerned 5.DR 6.GF By order Asst. Registrar, ITAT, Bangalore. Dy. Commissioner of Income-tax, Circle-1(1)(1), Bangalore v. Aruba Networks India Pvt. Ltd