M/s Philips India Ltd., Kolkata V. DCIT, CIR-11(2), KOLKATA, Kolkata

ITA 1068/KOL/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9457 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 30-01-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 03-08-2015
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: ARVIND SONDE; GUNJAM
• Keywords: Transfer pricing; International transaction; Rule of consistency; Retrospective amendment; Working capital adjustments
• Section: 92C; 143(3); 234B; 80G; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & DR.ARJUN LAL SAINI, AM] I.T.A NO. 1068/KOL/20 15 ASSESSMENT YEAR : 2006-0 7 M/S. PHILIPS INDIA LTD. -VS.- D.C.I.T., C IRCLE-11(2) KOLKATA KOLKATA [PAN : AABCP 9487 A] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI ARVIND SONDE, ADVOCATE & SH RI M.S.GUNJAM, AR FOR THE RESPONDENT : SHRI G.MALLIKARJUNA, CI T(DR) DATE OF HEARING : 30.01.2017. DATE OF PRONOUNCEMENT : 08.02.2017. ORDER PER N.V.VASUDEVAN, JM THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 22.05.2015 D.C.I.T., CIRCLE-11(2), KOLKATA PASSED U/S 143(3) R.W.S. 144C OF THE ACT. 2. THE ONLY ISSUE FOR CONSIDERATION IN THIS APPEAL BY THE ASSESSEE IS WITH REGARD TO THE DETERMINATION OF ARMS LENGTH (ALT) OF AN INTERNATIO NAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) UNDER THE PROVISION OF SECTION 92 OF THE ACT. 3. THE ASSESSEE, AMONGST OTHER LINES OF BUSINESS, I S ALSO ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IT PROVIDES SOFTWARE DEVEL OPMENT SERVICES TO ITS VARIOUS GROUP COMPANIES. DURING THE PREVIOUS YEAR RELEVANT TO AY 2006-07, THE ASSESSEE HAD A TURN OVER OF RS.381.3 CRORES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES RENDERED TO ITS AE. THE ASSESSEE JUSTIFIED ITS TRANSACTIONS WITH IT S AE AS ONE AT AN ARMS LENGTH ON THE 2 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 2 BASIS OF TRANSACTION NET MARGIN METHOD (TNMM). FOR THIS, OPERATING MARGIN DATA IN RESPECT OF COMPARABLE INDIAN COMPANIES WERE IDENTIF IED BY THE ASSESSEE. HENCE, TNMM, USING OPERATING MARGIN ON OPERATING COST AS T HE PLI (PROFIT LEVEL INDICATOR) WAS SELECTED AS THE MOST APPROPRIATE METHOD. 4. BASED ON THE ABOVE ANALYSIS, 20 COMPANIES WERE SELECTED BY THE ASSESSEE AND THEIR NET MARGIN WAS ANALYSED. IT WAS SEEN THAT THE AVERA GE OPERATING MARGIN ON OPERATING COSTS PERCENTAGE OF THESE COMPANIES WAS BETWEEN (- ) 61.5% TO 46.4%. THE ARITHMETIC MEAN OF THE ABOVE MENTIONED COMPANIES WAS 9.6%. TH IS MARGIN WAS TAKEN AS THE BENCHMARK FOR COMPARISON OF THE OPERATING MARGIN OV ER OPERATING COST EARNED BY THE ASSESSEE FROM ITS SOFTWARE DEVELOPMENT SERVICES REN DERED TO ITS AE. DURING THE YEAR THE ASSESSEE HAD EARNED AN OPERATING MARGIN OF 12% ON TRANSACTIONS WITH THE AE. HENCE, IT WAS CONCLUDED BY THE ASSESSEE THAT THE PR OVISION OF SOFTWARE DEVELOPMENT AND SOFTWARE SERVICES TO ITS OVERSEAS AES WERE AT AN AR MS LENGTH. 5. THE AO ON CONSIDERATION OF THE ABOVE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE WAS OF THE VIEW THAT THE ASSESSEE HAD INCL UDED LOSS MAKING COMPANIES IN THE LIST OF COMPARABLE COMPANIES. THE ASSESSEE IN REPLY SUBMITTED THAT INDUSTRY REPRESENTS ALL KINDS OF COMPANIES NEW OR OLD LOSS, PROFIT MAKI NG OR INCURRING LOSS AND THEREFORE IT WOULD BE INAPPROPRIATE TO IGNORE FUNCTIONALLY SIMIL AR COMPANIES ONLY FOR THE REASON THAT THEY ARE LOSS MAKING COMPANIES. THE TRANSFER PRICIN G OFFICER (TPO) HOWEVER WAS OF THE VIEW THAT THE LOSS MAKING COMPANIES SHOULD BE E XCLUDED FROM THE LIST OF COMPARABLE COMPANIES. ANOTHER QUERY RAISED BY THE T PO WAS AS TO WHY COMPANIES HAVING VERY LOW TURNOVER WERE CHOSEN AS COMPARABLE COMPANIES. THE TPO IN THIS REGARD FOUND THAT THE TURNOVER OF THE ASSESSEE FROM RENDERING SOFTWARE SERVICES TO ITS AE WAS RS.381.3 CRORES WHEREAS THE COMPANIES HAVING TURNOVER AS LOW AS RS.1.5 CRORES HAS BEEN INCLUDED IN THE LIST OF COMPARABLE COMPANI ES. SIMILARLY COMPANIES HAVING VERY HUGE TURN OVER RANGING FROM RS.9449 CRORES AND RS.4792 CRORES WERE ALSO INCLUDED 3 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 3 IN THE LIST OF COMPARABLE COMPANIES BY THE ASSESSEE . ACCORDING TO THE TPO COMPANIES HAVING SUCH HUGE TURN OVER OUGHT NOT TO HAVE BEEN C HOSEN AS COMPARABLE COMPANIES BY THE ASSESSEE. THE ASSESSEE SUBMITTED BEFORE THE AO THAT FUNCTIONAL COMPARABILITY WOULD BE MATERIAL EVEN IF THE TURNOVER IS CONSIDERED AS B ASIS FOR INCLUDING OR EXCLUDING A COMPANY. THE TPO HAD NOT SPELT OUT ANY BASIS ON WHI CH THE PRINCIPLE OF LOWER LIMITS OF THE TURNOVER HAD TO BE FIXED FOR THE PURPOSE OF COM PARABILITY. THE TPO HOWEVER WAS OF THE VIEW THAT THE COMPANIES HAVING VERY LOW TURNOVE R COMPARED TO THAT OF THE ASSESSEE AND VERY HIGH TURNOVER COMPARED TO THAT OF THE ASSE SSEE OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 6. THE TPO ACCEPTED SIX OUT OF 20 COMPARABLES C HOSEN BY THE ASSESSEE. IN ADDITION TO THE ABOVE THE TPO ADDED THREE MORE COMPANIES NAM ELY M/S. MPHASIS BFL LTD., M/S. VISUAL SOFT TECHNOLOGIES LTD AND M/S BLUE STAR INFOTECH LTD., AS COMPARABLE COMPANIES. THUS THE TPO ARRIVED AT THE LIST OF NINE COMPARABLE COMPANIES HAVING THE FOLLOWING AVERAGE ARITHMETIC MEAN OF PROFIT TO THE TOTAL COST AS FOLLOWS :- AFTER SUCH FILTRATION, IT IS FOUND OUT THAT THE FO LLOWING COMPANIES CAN BE SELECTED FOR THE PURPOSES OF COMPARISON OUT OF THE LIST 20 COMPANIES SUBMITTED BY THE ASSESSEE : SL. NO. NAME OF THE COMPANY 2004 OP/TC% 2005 OP/TC% 2006 OP/TC% TOTAL AVERAGE OP/TC% 1. M/S. MPHASIS BFL LTD. 53.78 17.39 23.27 94.44 31.48 2. M/S. VISUAL SOFT TECHNOLOGIES LTD. 26.92 14.37 10.06 51.35 17.11 3. M/S. BLUE STAR INFOTECH LTD. 21.31 13.10 5.16 39.57 13.19 4. M/S. INFOTECH LTD. LOSS 4.02 7.83 11.85 5.92 5. M/S FTECH INFOSYS LTD. 51.08. 43.25 NA 94.33 47.16 6. M/S AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD LOSS 19.40 22.79 42.19 21.09 7. M/S K P I T CUMMINS INFOSYSTEMS LIMITED 13.29 12.87 12.15 38.31 12.77 8. M/S PRITHVI INFORMATION SOLUTIONS LTD. 8.30 10.53 NA 18.83 9.41 4 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 4 9. M/S R.S.SOFTWARE LTD. LOSS 7.57 NA 7.57 7.57 AVERAGE 18.41 THE ARITHMETIC MEAN OF THE OPERATING PROFIT ON OPER ATING COST COMES TO 18.41% AS COMPARED TO THE OPERATING MARGIN ON OPERATING COST OF THE SOFTWARE DIVISION OF THE ASSESSEE COMPANY. WHICH IS 12%. HENCE. BY TAKING THE OPERATING PROFIT ON OPERATING COST PERCENTAGE AS 18.41 % AS THE BENCHMARK, THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS REPRESENTING PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE COMPA NY TO ITS AES DURING THE YEAR 2004- 05 ARE RE-DETERMINED AS UNDER ;- OPERATING MARGIN DECLARED BY THE ASSESSEE AT 12% OPERATING MARTIN PERCENTAGE- RS.40.80 CRO RES OPERATING PROFIT MARGIN TAKING THE OPERATING MARGIN PERCENTAGE AT 18.41 % RS.62.S9 CRORES ARM'S LENGTH PRICE ADJUSTMENT - RS.21.79 CRORES HENCE, AN ADDITION OF 1.79 CRORES HAS TO BE MADE TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 7. THE AO PROPOSED TO MAKE THE ABOVE SUGGESTION S BY THE TPO IN HIS ORDER DATED 30.10.2009 PASSED U/S 92CA(3) OF THE ACT AND ULTIMA TELY ACCEPTED THE TPOS PROPOSAL IN THE DRAFT ASSESSMENT ORDER DATED 14.12.2009. THE ASSESSEE FILED OBJECTIONS TO THE DRAFT ASSESSMENT ORDER BEFORE THE DRP IN TERMS OF SECTION 144C OF THE ACT. THE PRIMARY CONTENTION OF THE ASSESSEE WAS EXCLUSION OF CERTAIN COMPARABLE COMPANIES CHOSEN BY THE TPO. THE ASSESSEE ALSO PRAYED FOR ADJUSTMENT TO THE MARGINS DETERMINED BY THE TPO BY ALLOWING RISK ADJUSTMENT AND WORKING CAPITAL ADJUSTMENTS. THE DRP BY ITS DIRECTIONS DATED 17.06.2010 ACCEPTED THE STAND OF T HE ASSESSEE IN SO FAR AS IT RELATES TO EXCLUSION OF THREE COMPARABLE COMPANIES NAMELY M/S. MPHASIS BFL LTD., M/S. VISUAL SOFT TECHNOLOGIES LTD AND M/S. BLUE STAR INFOTECH L TD. THE DRP HOWEVER REFUSED TO ALLOW ANY ADJUSTMENT TOWARDS WORKING CAPITAL ADJUST MENT AND RISK ADJUSTMENT. THE RELEVANT OBSERVATIONS OF THE DRP IN THIS REGARD ARE AS FOLLOWS :- 14. THE PANEL REVIEWED THE TWO SAMPLES - ONE BY TH E ASSESSEE OF 20 COMPANIES AND THE OTHER BY THE TPO HAVING 9 COMPANIES. CLOSE SCRUTINY OF THE TWO SAMPLES SHOWED THAT 5 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 5 WITHIN THE SAMPLE THERE WERE STILL A NUMBER OF COMP ANIES WHICH HAD LOWER TURNOVER THAN THE ASSESSEE COMPANY. THE TURNOVER, IT WAS FELT, BY THE PANEL WAS AN IMPORTANT CRITERIA TO CONSIDER A PARTICULAR SAMPLE. SO AFTER DUE CONSIDER ATION, IT WAS DECIDED TO APPLY A FILTER ON THE BASIS OF THE' TURNOVER. IT WAS DECIDED TO FILTE R OUT ALL THOSE COMPANIES WHICH HAD TURNOVER OF LESS THAN RS. 150 CRORES. THIS RESULTE D IN A SAMPLE OF JUST 6 COMPANIES. IN THIS SAMPLE, THERE WERE 5 COMPANIES, NAMELY, M/S 31 INFOTECH, AFTEK INFOSYS, AZTEC SOFTWARE & TECHNOLOGY SERVICES, KPIT CUMMINS INFOSY STEMS, PRITHVI INFORMATION SOLUTIONS WHICH WERE PART OF THE ASSESSEE'S TP STUD Y AND ONE COMPANY, NAMELY, M/S VISUAL SOFT TECHNOLOGIES, WHICH WAS AS PER THE TPO' S ORDER. BASED OH THE ABOVE, THE AVERAGE OPERATING MARGIN CAME TO BE 17.77%. THIS MA RGIN IS BEYOND 5% OF THE PRICE AS PROVIDED FOR IN SECTION 92C(2) OF THE IT ACT, AND S O CAN BE USED FOR THE ARM'S LENGTH PRICE ADJUSTMENTS. 15. THE ASSESSEE IN ITS SUBMISSION DATED 02.06.2010 TO THE PANEL ALSO STATED IT HAD SUBMITTED BEFORE THE TPO REQUESTING TO MAKE ADJUSTM ENTS TO THE COMPARABLE COMPANIES' MARGINS ON ACCOUNT OF THE VARIOUS' DIFFERENCES. THE SE ADJUSTMENTS ARE ON ACCOUNT OF THE FOLLOWING: RISK. ADJUSTMENT : THIS ADJUSTMENT, ACCORDING TO THE ASSESSEE, WAS S OUGHT ON ACCOUNT OF THE DIFFERENCE IN THE RISK PROFILE OF A CAPTIVE SER VICE PROVIDER (ASSUMING LESS THAN THE NORMAL RISKS) AND FULL-FLEDGED ENTREPRENEURS (BEARI NG BUSINESS AND OPERATIONAL RISKS). THE ASSESSEE STATED THAT WHERE A RISK-INSULATED CAPTIVE SERVICE PROVIDER WOULD EARN LOW RETURNS, A FULL-FLEDGED 'ENTREPRENEUR WOULD EARN HI GHER RETURNS, ON THE BASIS OF HIGHER THE RISK HIGHER THE RETURNS. THE ASSESSEE SOUGHT THE AB OVE ADJUSTMENT TO BE CALCULATED ON THE BASIS OF THE DIFFERENCE BETWEEN PRIME 'LENDING RATE (PLR) AND THE BANK RATE, AND DETERMINED THE SAME AT 4.75% (PLR, 10.75% - BANK RA TE, 6.00%). IT WAS ALSO CONTENDED BY THE ASSESSEE THAT THE ABOVE COMPUTATION OF RISK ADJUSTMENT WAS UPHELD BY THE ITAT, BANGALORE BENCH IN THE ASSESSEE'S OWN CASE FOR AY 2 003-04. . WORKING CAPITAL ADJUSTMENTS : THE ASSESSEE STATED THAT SINCE IT IS A CAPTIVE CO NTRACT SERVICE PROVIDER, RENDERING SOFTWARE SERVICES TO IT S AES, THE COLLECTION CYCLE OF RECEIVABLES FROM ITS CUSTOMERS IS SHORTER AS COMPARED TO THOSE HAVING THIRD PARTY SERVICE PROVIDERS. ACCORDINGLY, THE ASSESSEE STATED, WORKING CAPITAL A DJUSTMENTS SHOULD BE ALLOWED AS HELD IN THE CASE OF MENTOR GRAPHICS BY THE ITAT, DELHI BENC H. THE ASSESSEE BASED ON THE ABOVE LOGIC DEMANDED A SUITABLE ADJUSTMENT FOR THE DIFFER ENCES IN THE WORKING CAPITAL POSITION. OTHER ADJUSTMENTS : FOR THIS, THE ASSESSEE SOUGHT ADJUSTMENTS FOR R&D EXPENSES, MARKETING EXPENDITURE AND ACCOUNTING POLICIES, BUT DID NOT PROVIDE ANY LOGIC FOR THE ABOVE ADJUSTMENTS. 16. THE DEMAND FOR RISK ADJUSTMENTS WAS SOUGHT, AS. STATED ABOVE, ON THE BASIS OF THE DIFFERENCE BETWEEN THE PLR AND THE BANK RATE. THE P RIME LENDING RATE IS A BENCHMARK INTEREST RATE TO WHICH ALL LOANS 'ARE LINKED. IT IS A TERM APPLIED AS A REFERENCE INTEREST RATE USED BY BANKS. BANK RATES, ALSO REFERRED TO AS THE DISCOUNT RATE, IS THE RATE OF INTEREST WHICH A CENTRAL BANK CHARGES ON THE LOANS .AND ADVANCES T HAT IT EXTENDS TO COMMERCIAL BANKS AND OTHER FINANCIAL INTERMEDIARIES. BOTH THESE RATES FO R CALCULATION OF RISK ADJUSTMENTS, IT WAS FELT BY THE PANEL, ARE MORE APPROPRIATE FOR THE BA NK LENDING AND BORROWING, AND THE WAY WAS SOUGHT BY THE ASSESSEE TO BE USED. HERE IS MOR E THEORETICAL THAN REAL: THE PANEL FURTHER FELT. THAT THE METHODOLOGY AS PROPOSED BY T HE ASSESSEE DID NOT SHOW HOW IT REALLY 6 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 6 MEASURED THE RISK OF THE ASSESSEE. SINCE THERE WAS NO FORCE IN THE ARGUMENTS OF THE ASSESSEE AND THE MEASURE SOUGHT WAS MORE GLOBAL THA N SPECIFIC, THE SAME CANNOT BE ALLOWED, THE PANEL FELT. 17. SIMILARLY FOR THE WORKING CAPITAL ADJUSTMENTS. THE ASSESSEE DID NOT PROVIDE ANY SPECIFIC NUMBER. IT JUST PROVIDED A METHODOLOGY WIT HOUT BEING SPECIFIC. IT WAS NOT OBVIOUS TO THE PANEL WHAT TYPE OF RISK ADJUSTMENTS SHOULD B E MADE TO CONVERT THE RISK-BEARING COMPARABLE INTO ONE THAT IS HIGHLY CUSTOMIZED AND T HAT IS SUCH THAT IT REDUCES THE RISKS. NO DOUBT THE PRINCIPLE OF PROVIDING REASONABLE AND ACC URATE ADJUSTMENTS CANNOT BE ARGUED AGAINST AS IT IS REQUIRED, AND THE IT ACT DOES PROV IDE FOR THAT, BUT IN THE ABSENCE OF LIMITED GUIDANCE ON THE METHODOLOGY TO BE ADOPTED, AND NO S UCH METHODOLOGY BEING PROVIDED BY THE ASSESSEE WHICH COULD BE CONSIDERED REASONABLE A ND ACCURATE, THE ADJUSTMENTS CANNOT BE ALLOWED. IT WOULD BE BEYOND THIS PANEL TO COME U P WITH A SPECIFIC NUMBER FOR ADJUSTMENTS. HENCE IN VIEW OF THE SAME, THE ADJUSTM ENTS AS REQUESTED BY THE ASSESSEE ARE DENIED. IN FACT, THERE. WAS NO FORCE IN THE SUBMISS ION OF THE ASSESSEE AND THE DEMAND BY THEM WAS NEITHER SPECIFIC NOR ACCURATE. 8. AFTER THE ORDER OF DRP THE TPO PASSED THE ORD ER OF ASSESSMENT U/S 143(3) R.W.S. 144C OF THE ACT DATED 30.07.2010. AGAINST THE AFORE SAID FAIR ORDER OF THE ASSESSMENT THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL IN IT A NO.1887/KOL/2010. THE TRIBUNAL VIDE ITS ORDER DATED 07.03.2010 HAD NOT ALLOWED ANY RELIEF TO THE ASSESSEE. THE ASSESSEE FILED AN APPEAL BEFORE THE HONBLE CALCUTTA HIGH CO URT AND THE HONBLE CALCUTTA HIGH COURT VIDE ITS ORDER DATED 13.10.2012 IN ITS G.A.NO .2012 HELD THAT THE ENTIRE MATTER SHOULD BE REMANDED FOR FRESH HEARING BY THE TRIBUNA L. ACCORDINGLY THE APPEAL WAS RESTORED TO THE FILE OF THE TRIBUNAL FOR FRESH HEAR ING. 9. THE TRIBUNAL BY AN ORDER DATED 19.06.2013 RE MANDED CERTAIN ISSUE TO THE DRP FOR FRESH CONSIDERATION. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE ITAT : 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT TH E OUTSET A PERUSAL OF THE ORDER OF THE DRP CLEARLY SHOWS THAT THE DRP HAS REJECTED THE ASSESSEES APPLICATION IN FORM NO.35A IN RESPECT OF THE DRAFT ASSESSMENT ORDER WIT HOUT GIVING ANY SPECIFIC VALID REASONS AS HAS BEEN RIGHTLY POINTED OUT BY THE LD. AR. THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAS GIVEN THE DECISION IN FAVOUR OF THE ASSESSEE IN RE SPECT OF WORKING CAPITAL ADJUSTMENTS AS ALSO RISK PROFILE ADJUSTMENTS. ADJUSTMENTS ON THIS ACCOUNT HAVE NOT BEEN GRANTED TO THE ASSESSEE NOR HAS ANY VALID REASONS BEEN GIVEN IN DE NYING THE ADJUSTMENTS. ADMITTEDLY IN RESPECT OF THE RISK ADJUSTMENT THE DRP ITSELF ADMIT S THAT AN ADJUSTMENT IS TO BE GIVEN AND IT IS PERMISSIBLE UNDER THE INCOME TAX ACT. ONCE IT IS ACCEPTED THAT AN ADJUSTMENT MUST BE 7 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 7 GIVEN AND IT IS PERMISSIBLE UNDER THE INCOME TAX AC T THERE IS NO REASON FOR NOT GIVING THE ADJUSTMENT. AN ADJUSTMENT LIABLE TO BE GIVEN AS PER THE PROVISION OF THE ACT MUST BE GIVEN, IN THE FAILURE OF WHICH THE ORDER ITSELF WOULD BECO ME ERRONEOUS. FURTHER, THE DRP HAS NOT GIVEN ANY FINDING IN RESPECT OF THE CLAIM OF THE AS SESSEE THAT WORKING CAPITAL ADJUSTMENT IS TO BE GIVEN ESPECIALLY WHEN THE ASSESSEE ITSELF HAS PROVIDED THE CALCULATION FOR THE SAME. THE DRP HAS ALSO NOT ANSWERED THE ISSUE RAISED BY T HE ASSESSEE THAT M/S. AFTECH INFOSYS LTD. MUST BE REMOVED AS ITS INTELLECTUAL PROPERTIE S CONSTITUTE 81% OF THE TOTAL ASSETS. THE DRP HAS ALSO NOT ANSWERED THE ISSUE AS TO WHY THE C OMPANY M/S. SASKEN TECHNOLOGIES LTD. WAS NOT INCLUDED AS COMPARABLE FOR A.YR. 2006- 07 WHEN FOR THE IMMEDIATELY EARLIER ASSESSMENT YEAR AND SUBSEQUENT ASSESSMENT YEARS THE SAID COMPANY WAS CONSIDERED. IN THIS CIRCUMSTANCES WE ARE OF THE VIEW THAT THE ISSU E OF THE TP ADJUSTMENTS IS LIABLE TO BE RESTORED TO THE FILE OF THE DRP FOR RE-ADJUDICATION AFTER TAKING INTO CONSIDERATION AND ANSWERING THE ISSUE AS RAISED BY THE ASSESSEE IN IT S OBJECTIONS AND WE DO SO. 7. IN THE RESULT THE ISSUE OF THE TRANSFER PRICING ADJUSTMENT IS RESTORED TO THE FILE OF THE DRP FOR RE-ADJUDICATION AFTER GRANTING THE ASSESSEE ADEQUATE OPPORTUNITY. 10. THE DRP ADJUDICATED THE ISSUE AFRESH AND IDE NTIFIED FOUR ISSUES ARISING FOR CONSIDERATION PURSUANT TO THE ORDER OF THE TRIBUNAL DATED 19.06.2013 IN ITA NO.1787/KOL/2010 I. CLAIM OF RISK ADJUSTMENT II. CLAIM OF WORKING CAPITAL ADJUSTMENT III. REMOVAL OF COMPARABLE (AFTEK INFOSYS LTD.) SOUGHT B Y ASSESSEE IV. INCLUSION OF COMPARABLE (SASKEN TECHNOLOGIES LTD.) SOUGHT BY THE ASSESSEE. 11. AS FAR AS THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTMENT AND WORKIING CAPITAL ADJUSTMENTS IS CONCERNED THE DRP HELD AS FOLLOWS :- 10.0 FINDING: 10.1 DRP HAS CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE TAXPAYER. THE PANEL IS NOT INCLINED TO ACCEPT THE A SSESSEE'S CLAIM OF RISK ADJUSTMENT. RISK ADJUSTMENT AS A GENERAL RULE CANNOT BE ALLOWED UNLE SS IT IS CLEARLY SHOWN THAT THE COMPARABLES HAD ACTUALLY UNDERTAKEN SUCH RISK AND H OW THE SAME MATERIALLY AFFECTED THEIR MARGINS. UNLESS IT IS SHOWN THAT HOW THE RISK ADJUS TMENT WOULD CHANGE THE RESULT OF EACH COMPARABLE AND HOW THE SAME WOULD IMPROVE THE COMPA RABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENT, NO ADJUSTMEN T CAN BE ALLOWED TO THE TAXPAYER. LN THE PRESENT CASE, EXCEPT POINTING OUT VARIOUS RISKS , THE TAXPAYER HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALL Y UNDERTAKEN OR NOT BY THE COMPARABLES 8 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 8 AND IF SO, HOW THESE RISKS AFFECTED EACH OF THEM AN D WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABILITY. 10.2 FURTHER, THE PANEL IS OF THE VIEW THAT A PURPO SE SPECIFIC CAPTIVE AGENCY LIKE THE ASSESSEE IS NOT ENTIRELY RISK FREE. THE ASSESSEE IS IN A BUSINESS WHICH REQUIRES SKILLED MANPOWER. SKILLED MANPOWER IS THE HUMAN CAPITAL REL ATED INTANGIBLE ASSETS. THE JUDGMENT OF APPELLATE TAX COURT, USA IN THE CASE OF LTHACA I NDUSTRIES INC. V. CIR 97 TC 253, HIGHLIGHTS THAT IN A KNOWLEDGE ORGANIZATION, THERE IS A LITTLE MACHINERY OTHER THAN THE EMPLOYEES, BECAUSE ONLY PEOPLE CAN ACT, EMPLOYEES B ECOME BOTH THE MIND OF THE MACHINES AND MACHINES THEMSELVES. THEREFORE, RETENT ION OF SKILLED WORK FORCE IS AN ISSUE DUE TO THE GLOBALIZATION OF TRADE AND CONSEQUENTLY MANY NEW OPPORTUNITIES ARE AVAILABLE TO SKILLED STAFF. THE ASSESSEE HAS DEVELOPED ITS OWN H UMAN CAPITAL INTANGIBLE AT ITS OWN COST AND ALL THE RISKS RELATED IN CREATION AND MAINTENAN CE OF HUMAN INTANGIBLE ARE BORNE BY THE ASSESSEE. THUS, IT IS NOT CORRECT ON THE PART OF TH E ASSESSEE TO SAY THAT IT DOES NOT ASSUME ANY RISK AND IT IS A RISK FREE ENTITY. THE RISK ANA LYSIS MAY BE SUMMARIZED AS UNDER: + THE TAXPAYER IS TOTALLY DEPENDENT ON THE AE FOR B USINESS. THUS, THE TAXPAYER TAKES THE RISKS ASSOCIATED WITH HEAVY DEPENDENCE ON A SINGLE CUSTOMER. IN COMMON BUSINESS PARLANCE IT IS KNOWN AS SINGLE CUSTOMER RISK. THE COMPENSATION MODEL WITH THE AE DOES NOT GUARA NTEE VOLUME OF BUSINESS NOR THE PERIOD. THE AGREEMENT CAN BE TERMINATED BY ANY PART Y AT ANY TIME AFTER GIVING A STIPULATED PERIOD NOTICE. THUS THE TAXPAYER IS NOT FREE FROM T HE RISK OF LOSING BUSINESS ENTIRELY OR LOSING VOLUME OF BUSINESS. + THE TAXPAYER IS NOT COMPENSATED ANY AMOUNT FOR TE RMINATION OF AGREEMENT EVEN IF IT IS TERMINATED WITHOUT ANY CAUSE. NO INDEPENDENT ENTERP RISE WOULD LIKE TO AGREE FOR A TERMINATION CLAUSE WITHOUT COMPENSATION IF IT IS TE RMINATED WITHOUT ANY CAUSE. THE AE IS EXPOSED TO THE MARKET RISK AND ANY FLUC TUATION IN THE BUSINESS CONDITIONS OF THE AE AFFECT THE TAXPAYER. THUS, EVEN IF INDEPENDE NT COMPARABLES UNDERTAKE SOME RISK, THE TAXPAYER ALSO HAD TO UNDERTAKE RISKS. + THE INDEPENDENT ENTREPRENEUR HAS TO INCUR EXPENDI TURE ON MARKETING, ETC. WHICH IS DEBITED TO THE P&L ALE. BUT, IT IS ALWAYS NOT NECES SARY THAT THESE RISKS REFLECTED IN THE MARKETING, SALES PROMOTION EXPENSES WILL AUTOMATICA LLY BE COMPENSATED BY INCREASE IN SALES OR HIGHER MARGINS. FOR EXAMPLE, INCREASED MAR KETING EFFORTS IN SOME SEGMENTS OF EXPORT MARKET MAY NOT YIELD RESULTS FOR A SOFTWARE DEVELOPMENT COMPANY AND THEREBY THERE MAY BE A LOSS ON THIS MARKETING EFFORT WHICH MAY BRING DOWN THE OVERALL PROFITABILITY RATHER THAN INCREASE THE PROFITABILIT Y. THUS IF UNDERTAKING THE MARKET RISK ETC. HELPS IN EARNING ANY EXTRA MARGIN, THE BENEFIT IS M ORE THAN SET OFF BY THE CORRESPONDING EXPENDITURE. THE SAME APPLIES TO CREDIT RISK UNDERT AKEN. IT IS INCORRECT TO SAY THAT HIGHER THE RISK, THE HIGHER IS THE MARGIN THOUGH IT IS TRUE THAT HIGHER RISK EXPECTS A HIGHER MARGIN. THUS REALIZATI ON OF RISK IS DIFFERENT FROM EXPECTED RETURN BASED ON RISK UNDERTAKEN. FINALLY SELECTED C ORNPARABLES HAD ALMOST SIMILAR RISKS BUT MARGINS VARIED. THE TAXPAYER'S SINGLE CUSTOMER RISK MORE THAN OFF SETS ANY OTHER RISK DIFFERENTIAL BETWEEN THE TAXPAYER AND THE COMPARABLE COMPANIES. DIFFERENT COMPARABLES CAN HAVE DIFFERENT RISK PRO FILES AND DIFFERENT PROFIT MARGINS. THE PROVISO TO S. 92C(2) OF THE ACT PROVIDES FOR ADOPTI NG ARITHMETICAL MEAN OF THE DIFFERENT 9 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 9 PRICES. THIS PROVISION NEUTRALIZES THE EFFECT OF DI FFERENCE IN THE RISK PROFILE, IF ANY BETWEEN THE TAXPAYER AND THE COMPARABLES AS REALIZED RISK M AY PULL DOWN THE PROFITABILITY BELOW THE RISK FREE RETURN. IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS, IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROFITABILITY. THE TAXPAYER HAS NOT DONE SO. 10.3 THE COMPUTATION OF RISK ADJUSTMENT HAS TO BE B ASED ON ROBUST DATA, WHICH IS NOT SHOWN HEREIN. THE TAXPAYER IN THE INSTANT CASE HAS SET UP A BUSINESS IN INDIA AND THEREFORE IT HAS TO BE COMPARED WITH INDEPENDENT BUSINESS ENT REPRENEURS AND NOT WITH PASSIVE INVESTORS. 10.4 IN CASE OF MOTOROLA SOLUTIONS EMPHATICALLY REF ERRED TO BY THE LD AR (ITA NO 5637/DEI/2011), THE HON'BLE BENCH HAS NOT ACCEDED T O THE REQUEST FOR RISK ADJUSTMENT OF ACCEPTED CAPM, THEY HAVE MERELY RESTORED THE MATTER BACK FOR EXAMINATION. THE CITATION WOULD THEREFORE NOT HELP THE CASE OF THE ASSESSEE I N SEEKING THE ADJUSTMENT IN ABSENCE OF CLEAR AND PRECISE DATA TO JUSTIFY THE RISK ADJUSTME NT. 10.5 IN VIEW OF DISCUSSION ABOVE, THE PANEL IS OF C ONSIDERED VIEW THAT OBJECTION OF THE ASSESSEE DESERVES TO BE REJECTED. 12. WITH REGARD TO THE CLAIM OF THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT THE DRP GAVE THE FOLLOWING CONCLUSION :- 7.1. DRP HAS DULY CONSIDERED THE ISSUE. IT HAS BEEN NOTED THAT AS MENTIONED IN PARA 17 OF DRP KOLKATA'S ORDER, EVEN DURING HEARING BEFORE DRP KOLKATA, NO RELIABLE DATA WAS FURNISHED BY THE ASSESSEE REGARDING NEED FOR ANY WO RKING CAPITAL ADJUSTMENT. EVEN NOW, THE ASSESSEE HAS NOT ESTABLISHED ITS CLAIM BY PLACI NG ON RECORD ANY RELIABLE DATA TO SHOW THAT THERE IS SIGNIFICANT DIFFERENCE IN WORKING CAP ITAL REQUIREMENT OF THE COMPARABLES AND THAT OF THE ASSESSEE WHICH HAS BEARING ON PROFIT MA RGIN AND THEREFORE NEEDS TO BE ADJUSTED. WORKING CAPITAL ADJUSTMENTS ARE DIFFICULT TO APPLY DUE TO THE LACK OF ACCURATE AND RELIABLE DATA. APART FROM THE ISSUE OF UNRELIABLE DATA FOR T HE TESTED PARTY, ADEQUATE FINANCIAL DATA IS NOT AVAILABLE FOR THE COMPARABLE COMPANIES. WORKING CAPITAL ADJUSTMENT NEEDS TO BE GIVEN ON THE BASIS OF DAILY OR AT LEAST MONTHLY AVE RAGE OF PAYABLES, RECEIVABLES AND INVENTORY AND NOT ON THE BASIS OF YEAREND FIGURES. WHILE THESE DAILY AND MONTHLY FIGURES MAY BE AVAILABLE IN THE TAXPAYER'S CASE, THE SAME A RE NOT AVAILABLE IN THE CASE OF COMPARABLE COMPANIES. HENCE, CALCULATION OF REASONA BLY ACCURATE ADJUSTMENTS IS NOT POSSIBLE. FURTHER, THE ISSUE OF WORKING CAPITAL WOU LD BE RELEVANT ONLY WHEN THERE IS A SITUATION OF INVENTORY REMAINING TIED UP OR RECEIVA BLES BEING HELD UP. THESE SITUATIONS MAY NOT BE SO RELEVANT TO THE SERVICE INDUSTRY. 7.2 FURTHER, THIS ADJUSTMENT IS NOT GENERIC TO BE A LLOWED AS A ROUTINE. THE ASSESSEE HAS TO DEMONSTRATE UNAMBIGUOUSLY FOR THE RELEVANT PERIOD T HAT VARIATIONS IN WORKING CAPITAL PROFILE WOULD INDEED HAVE IMPACT ON THE MARGINS OF THE COMPARABLES. THE FACTUM OF WORKING CAPITAL ADJUSTMENT HAVING BEEN ALLOWED IN O THER YEARS WOULD HAVE NO BINDING 10 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 10 PROPOSITION UNLESS IT IS DEMONSTRATED THAT THE CAPI TAL PROFILES WERE IDENTICAL TO SUCH PERIODS. IN VIEW OF ABOVE DISCUSSION, THE PANEL IS OF THE CONSIDERED VIEW THAT THIS OBJECTION DESERVES TO BE REJECTED. 12. ON EXCLUDING AFTEK INFOSYS LTD. AS COMPARABLE THE DRP TOOK THE FOLLOWING VIEW :- DRP HAS DULY CONSIDERED SUBMISSIONS OF THE ASSESSE E. THERE IS NO EVIDENCE FURNISHED TO DRP ABOUT FUNCTIONAL DIFFERENTIATION OF THE COMPARA BLE. THE FUNCTIONAL PROFILE OF AFTEK AS PER FIRST PAGE OF THE ANNUAL REPORT DOES NOT GIVE A NY INDICATIONS OF ITS FUNCTIONALITY SO AS TO ENABLE US TO SPECIFY THE DIFFERENCES IN FUNCTIONALI TY OF THE COMPARABLE AND THE ASSESSEE. THOUGH THE COMPARABLE HAS SHOWN SIGNIFICANT IPRS, I N ABSENCE OF ANY DETAILS ABOUT THE NATURE AND PROFILE OF SUCH INTANGIBLES, IT WOULD BE INAPPROPRIATE TO ALLOW ITS EXCLUSION JUST ON THIS BASIS. IT WOULD ALSO BE PERTINENT TO POINT OUT THAT SUCH PLEA WAS NOT TAKEN BEFORE THE EARLIER DRP HEARING. FURTHER, THE ASSESSEE SEEK S EXCLUSION RELYING ON THE CASE OF QUALCOMM INDIA PVT LTD. IN 147 ITD 17 (DELHI) WHERE AFTEK WAS DIRECTED TO BE EXCLUDED FROM COMPARABLES LIST DUE TO DIFFERENT FUNCTIONAL P ROFILES OF AFTEK AND QUALCOMM. DRP HAS CAREFULLY GONE THROUGH SAID THE CASE LAW AND IT WAS SEEN THAT HON'BLE ITAT HAVE GIVEN FUNCTIONAL PROFILE OF QUALCOMM AS BEING ENGAG ED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND PROVIDING MARKETING SERVICES AND BE ING A CAPTIVE SERVICE PROVIDER TO ITS AES. IN PRESENT CASE, THE ASSESSEE COMPANY IS ENGAG ED IN BUSINESS OF SOFTWARE DEVELOPMENT. THIS CLEARLY DEMONSTRATES THE FUNCTION AL DIFFERENTIATION BETWEEN THE TWO AND AS A RESULT WE CANNOT APPLY MUTATIS MUTANDIS THE FI NDING GIVEN IN CASE OF QUALCOMM TO THE FACTS OF THE ASSESSEE. THEREFORE, THE ASSESSEE, IN OUR CONSIDERED VIEW IS NOT ENTITLED FOR EXCLUSION OF THIS COMPARABLE ESPECIALLY WHEN FUNCTI ONAL PROFILE DIFFERENCES COULD NOT BE DEMONSTRATED AND THE ASSESSEE IS TOTALLY SILENT ON ITS OWN IRP ISSUES WHICH ARE BOUND TO BE THERE AS IT IS EXTENDING SERVICES TO GROUP COMPANIE S AND IT IS MANDATORY IN SUCH SITUATIONS TO CREATE TEMPLATES TO STANDARDISE SERVICES ACROSS THE BOARD & THE NATURE OF IPRS ENJOYED BY THE COMPARABLE ARE TOO VAGUE AND UNSPECIFIED. TH E ONUS IS ON THE ASSESSEE TO SUBSTANTIATE ITS CLAIM. THE ASSESSEE HAS ALSO NOT D EMONSTRATED HOW CHANGE IN FINANCIAL YEAR FROM JUNE TO MARCH HAS AFFECTED THE PROFIT IN OF THE COMPARABLE. IN VIEW OF DISCUSSION ABOVE, THE OBJECTION OF THE ASSESSEE IS REJECTED. 13. AS FAR AS INCLUDING A COMPARABLE SASKEN TECHN OLOGIES LTD WHICH WAS EXCLUDED BY THE TPO THE DRP ACCEPTED THE CONTENTION OF THE ASSE SSEE AND HELD AS FOLLOWS :- 14.0 SASKEN TECHNOLOGIES LTD. 14.1. THE ASSESSEE HAS SUBMITTED THAT THIS COMPARA BLE HAS BEEN ACCEPTED BY THE TPO 14.2. IN VIEW OF THE FACT THAT THE FUNCTIONALITY OF THE ASSESSEE IS IDENTICAL FOR ALL THESE PERIODS, THIS CONTENTION IS ACCEPTED BY THIS DRP. T HE TPO/AO IS DIRECTED TO TAKE THIS COMPARABLE IN FINAL LIST AND RE-COMPUTE THE PROFIT MARGIN AND CONSEQUENT ADJUSTMENT, IF ANY THEREAFTER. THE OBJECTION IS ACCORDING ALLOWED. 11 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 11 14. PURSUANT TO THE AFORESAID DIRECTIONS OF THE D RP THE AO PROPOSED AN ADJUSTMENT OF RS.32.81 CRORES BY HIS ORDER DATED 21.05.2015 GIVIN G EFFECT TO THE DIRECTIONS OF THE DRP DATED 16.03.2015AS FOLLOWS :- 4. THE HON'BLE DRP, DELHI IN ITS ORDER DATED 16 .03.2015 HAS REJECTED THE ALL THE CLAIMS OF THE ASSESSEE EXCEPT FOR CLAIM 4 I.E. INCLUSION O F SASKEN TECHNOLOGIES LTD AS AMONG THE COMPARABLE. 5. THE ASSESSEE IN ITS ORIGINAL TRANSFER PRICING ST UDY HAS REJECTED THE COMPANY AS FUNCTIONALLY NOT COMPARABLE. HOWEVER, THIS OFFICE H AS CONSISTENTLY TAKEN A VIEW THAT THE M/S SASKEN COMMUNICATION TECHNOLOGIES LTD AS A COMP ARABLE IN SUBSEQUENT YEARS FOR THE SAME ASSESSEE AND AS NO DIFFERENCE IN FUNCTIONALITY OF THE ABOVE COMPARABLE IS OBSERVED THE DECISION OF THE DRP, DELHI ACCEPTED AND NO FURT HER APPEAL IS SUGGESTED. IT IS ALSO SEEN THAT AFTER GIVING EFFECT TO THE DIRECTIONS OF DRP T HE ADJUSTMENT IS 32.81 CRORES IN PLACE OF RS 21.79 CRORES AS IS CALCULATED IN THE ORDER U/S 9 2CA (3) DATED 30.10.2009. 6. THE COMPANY SASKEN COMMUNICATION TECHNOLOGIES LT D HAS TWO SEGMENT VIZ SOFTWARE SERVICES AND SOFTWARE PRODUCT SEGMENT. THE SEGMENT SOFTWARE SERVICES SEGMENT IS CONSIDERED AS COMPARABLE TO THE FUNCTIONS OF THE AS SESSEE. THE CALCULATION OF OPERATING PROFIT/OPERATING COST OF THE SOFTWARE SERVICES SEGM ENT OF THE COMPARABLE M/S SASKEN COMMUNICATION TECHNOLOGIES LTD ARE AS UNDER : SEGMENT SOFTWARE SERVICES PARTICULARS 2004 2005 2006 AVERAGE PLI SEGMENT REVENUE 12378.43 18905.47 24003.42 53.94% SEGMENT RESULT 4430.89 6916.49 7829.54 SEGMENT COST 7947.54 11988.98 16173.88 OP/TC(%) 55.75% 57.69% 48.40% AVERAGE PLI AFTER INCLUDING THE ABOVE AS COMPARABLE ARE CALCULATED AS UNDER : S.NO. NAME OF THE COMPANY 2004 OP/TC 2005 OP/TC 2006 OP/TC AVG- OP/TC 1. M/S. MPHASIS BPL LTD. 53.78 17.39 23.27 31.48 2. M/S. VISUAL SOFT TECHNOLOGIES LTD. 26.92 14.37 10.06 17.11 3. M/S. BLUESTAR INFOTECH LTD 21.31 13.10 5.16 13.19 4. M/S. 31 INFOTECH LTD. LOSS 4.02 7.83 5.92 5. M/S AFTEK INFOSYS 51.08 43.25 N.A. 47.16 12 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 12 LTD. 6. M/S. AZTEC SOFTWARE TECHNOLOGY LTD. LOSS 19.40 22.79 21.09 7. M/S. KPIT CUMMINS INFOSYSTEMS LTD. 13.29 12.87 12.15 12.77 8. M/S. PRITHVI INFORMATION SOLUTIONS LTD. 8.30 10.53 N.A. 9.41 9. M/S. R.S.SOFTWARE LTD. LOSS 7.57 N.A. 7.57 10 M/S. SASKEN COMMUNICATION TECHNOLOGIES LTD. 55.75 57.69 48.40 53.94 AVERAGE 21.96 THE ARITHMETIC MEAN OF THE OPERATING PROFIT ON OPER ATING COST COMES TO 21.96% AS CORN PARED TO THE OPERATING PROFIT ON OPERATING COST OF THE SOFTWARE DIVISION OF THE ASSESSEE COMPANY WHICH IS 12%. HENCE BY TAKING THE OPERATING PROFIT ON OPERATING C OST PERCENTAGE AT RS 21.96% AS THE BENCHMARK, THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION REPRESENTING PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE CO MPANY TO ITS A.E DURING THE YEAR 2004-05 ARE DETERMINED AS UNDER OPERATING MARGIN DECLARED BY THE ASSESSEE AT 12% OP ERATING MARGIN PERCENTAGE- RS 40.80 CRORES OPERATING MARGIN TAKING THE OPERATING MARGIN PERCEN TAGE AT 21.96%- RS 73.61 CRORES ARM'S LENGTH PRICE ADJUSTMENT RS 32.81 CRORES HENCE AN ADJUSTMENT OF RS.32.81 CRORES HAS TO BE MA DE FOLLOWING THE HONBLE DRP, DELHI ORDER. 15. IT CAN BE SEEN FROM THE AFORESAID PROPOSAL O F THE AO THAT THE ORIGINAL ADJUSTMENT BY THE TPO AT THE FIRST INSTANCE WAS RS.19,61,43,99 4/- WHICH WAS INCREASED TO RS.32,81,00,000/-. THE PROPOSAL AS ABOVE WAS INCORP ORATED BY THE AO IN HIS FAIR ORDER DATED 22.05.2015. AGGRIEVED BY THE AFORESAID ORDER OF THE AO DATED 22.05.2015GIVING EFFECT TO THE DIRECTIONS OF THE DRP U/S 144C OF THE ACT DATED 16.03.2015, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNA L. 13 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 13 16. THE FOLLOWING ARE THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE :- 1. ORDER ENHANCING THE INCOME IS BAD IN LAW 1.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN ENHANCING THE FIGURE OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF SOFTWARE SERVICES TO RS. 32,81,00,000 AS AGAINST RS. 19,61,43,994 DETERMINED IN THE FINAL ASSESSMENT ORDER DATED 30 JULY 2010 PASSED U/S.143(3) R.W.S. 144C OF THE I NCOME TAX ACT ('THE ACT'). 1.2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN NOT APPRECIATING THAT WHERE THE APPELLATE TRIBUNAL REMA NDS THE MATTER TO THE LOWER AUTHORITIES, THE ENHANCEMENT OF INCOME CANNOT BE MA DE. 2. ERRONEOUS INCLUSION OF THE COMPANIES AS COMPARABLE IN RESPECT OF SOFTWARE SERVICES WHICH ARE ALREADY REJECTED BY DRP VIDE ITS ORDER DA TED 17 JUNE 2010 2.1 THE LD. AO, AND THE TPO WHILE PASSING THE COMME NTS GIVING EFFECT TO DRP DIRECTIONS DATED 16 MARCH 2015 HAS ERRONEOUSLY CONSIDERED THE SAME SET OF COMPARABLES AS GIVEN IN THE TPO ORDER DATED 30 OCTOBER 2009. 2.2 THE LD. AO, AND THE TPO HAS ERRED IN LAW AND ON FACTS IN CONSIDERING THREE COMPARABLE COMPANIES NAMELY M/S MPHASIS BFL LTD., M /S BLUE STAR INFOTECH LTD., AND M/S R S SOFTWARE LTD WHICH HAD ALREADY BEEN REJECTE D BY THE HON'BLE DRP VIDE ITS ORDER DATED 17 JUNE 2010 AND ACCEPTED BY LD. AO IN THE FI NAL ASSESSMENT ORDER DATED 30 JULY 2010 PASSED U/S. 143(3) R.W.S. 144C OF THE ACT. 2.3 THE LD. AO, AND THE TPO HAD FAILED TO ACKNOWLED GE THAT A SET OF 6 COMPARABLE COMPANIES WAS ARRIVED HAVING AN ARM'S LENGTH MARGIN OF 17.77% VIDE DRP DIRECTIONS DATED 17 JUNE 2010. 2.4 THE LD. AO, AND THE TPO HAD FAILED TO ACKNOWLED GE THAT THE IT AT VIDE ORDER DATED 19 JUNE 2013 HAD REMANDED THE MATTER BACK TO DRP FO R FRESH ADJUDICATION ONLY ON FOUR ISSUES - 1) ALLOWANCE OF WORKING CAPITAL ADJUSTMENT 2) ALLOWANCE OF RISK ADJUSTMENT 3) REMOVAL OF AFTEK AS A COMPARABLE AND 4) INCLUSION O F SASKEN AS A COMPARABLE, THUS THE TPO/ AO SHOULD HAVE CONFINED THEMSELVES TO THE ISSU ES RESTORED FOR ADJUDICATION. THE LD. AO, AND THE TPO HAD NO AUTHORITY TO DISPUTE THE MAT TERS ALREADY SETTLED BEFORE THE APPELLATE AUTHORITIES DURING THE PREVIOUS PROCEEDIN GS. 3. ERRONEOUS CONSIDERATION OF SEGMENTAL MARGIN OF SASK EN FOR COMPUTING TRANSFER PRICING ADJUSTMENT ON SOFTWARE SERVICES 3.1 THE LD. AO, AND THE TPO WHILE PASSING THE COMME NTS GIVING EFFECT TO DRP DIRECTIONS DATED 16 MARCH 2015 HAS ERRONEOUSLY CONSIDERED THE SEGMENTAL RESULTS OF SAS KEN FOR COMPUTING TRANSFER PRICING ADJUSTMENT ON SOFTWARE S ERVICES AS AGAINST THE RESULTS AT ENTITY LEVEL CONSISTENTLY CONSIDERED BY HIM FOR OTHER ASSE SSMENT YEARS. 14 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 14 3.2 THE LD. AO, AND THE TPO ERRED IN NOT APPRECIATI NG THAT THE TPO IN ITS OWN ORDERS FOR PRECEDING YEARS I.E. AY 2005-06 AS WELL AS IN SUBSE QUENT YEARS I.E. AY 2007-08 TO AY 2011-12 HAS CONSIDERED THE MARGIN OF SASKEN AT OVER ALL ENTITY LEVEL. THUS, FOLLOWING THE PRINCIPLE OF CONSISTENCY, ENTITY LEVEL MARGIN OF SA SKEN SHOULD BE CONSIDERED. 3.3 WITHOUT PREJUDICE, THE LD. AO, AND THE TPO ERRE D IN NOT CONSIDERING THE UNALLOCATED EXPENSES PROVIDED IN THE SEGMENT REPORTING OF THE A NNUAL REPORT OF SASKEN WHILE DOING THE SEGMENTAL MARGIN COMPUTATION, AS A RESULT OF WH ICH THE MARGIN SO COMPUTED BY TPO IS SIGNIFICANTLY SKEWED AND DISTORTED. 4. NON- REJECTION OF AFTEK AS A COMPARABLE 4.1 THE LEARNED AO, DRP AND THE TPO ERRED IN NOT CO NSIDERING THE CLAIM OF THE APPELLANT FOR REJECTING AFTEK AS A COMPARABLE COMPA NY. 4.2 THE LEARNED AO, DRP AND THE TPO ERRED IN NOT CO NSIDERING THAT AFTEK IS FUNCTIONALLY DISSIMILAR TO THE APPELLANT. 4.3 THE LEARNED AO, DRP AND THE TPO ERRED IN NOT CO NSIDERING THAT AFTEK SHOULD BE REJECTED AS IT ENJOYS SIGNIFICANT BENEFITS ON ACCOU NT OF INTELLECTUAL PROPERTY RIGHTS ('IPR'), WHICH CONSTITUTES NEARLY 81 % OF THE TOTAL NET FIXE D ASSETS OF THE COMPANY. 4.4 THE LEARNED AO, DRP AND THE TPO ERRED IN NOT CO NSIDERING THAT AFTEK UNDERWENT A FINANCIAL REORGANIZATION, HAS CHANGED ITS FINANCIAL YEAR FROM JUNE TO MARCH AND THUS THE FINANCIAL STATEMENTS OF AFTEK IS NOT COMPARABLE TO THE APPELLANT. 5. VARIATION OF 5% FROM THE ARITHMETIC MEAN 5.1. THE LD. AO, DRP AND TPO ERRED IN LAW IN NOT GR ANTING THE BENEFITS OF +/-5% VARIANCE AS PER PROVISO TO SECTION 92C(2) OF THE AC T TO THE APPELLANT. 6. NON-ALLOWANCE OF APPROPRIATE ADJUSTMENTS AS PER RUL E 10B 6.1. THE LD. AO, DRP AND TPO ERRED IN LAW AND ON FA CTS IN NOT GRANTING THE ADJUSTMENT ON ACCOUNT OF THE DIFFERENCES IN THE WORKING CAPITA L ADJUSTMENTS BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 6.2. THE LD. AO, DRP AND THE TPO ERRED IN LAW AND O N FACTS IN NOT GRANTING THE ADJUSTMENT ON ACCOUNT OF, DIFFERENCES IN THE RISK P ROFILE BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 6.3. THE LD. AO, DRP AND TPO ERRED IN MAKING ERRONE OUS OBSERVATION IN DENYING THE WORKING CAPITAL/RISK ADJUSTMENT AND FAILED TO FOLLO W THE OBSERVATION MADE BY HON 'BLE ITAT WHEREIN ITAT IN ITS ORDER DATED 19 JUNE 2013 H AD MENTIONED THAT IN RESPECT OF RISK ADJUSTMENT, IF THE DRP ITSELF (PAGE NO. 8 OF THE DR P DIRECTIONS DATED 17 JUNE 2010) HAD IN 15 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 15 PRINCIPLE ADMITTED THAT AN ADJUSTMENT IS TO BE GIVE N AND IT IS PERMISSIBLE UNDER THE IT ACT, THERE IS NO REASON FOR NOT GIVING THE ADJUSTMENT. . 6.4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, ADJUSTMENTS FOR WORKING CAPITAL AND RISK ADJUSTMENT SHOULD BE ALLOWED AS THE SAME HAVE BEEN ALLOWED BY DRP IN APPELLANT'S OWN CASE IN SUBSEQUENT YEAR. 7. NON GRANT OF DEDUCTION UNDER SECTION 80G OF THE ACT THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO ERRED IN NOT GRANTING THE BENEFIT OF DEDUCTION UNDER SECTION 80G OF THE ACT AMOUNTING TO RS. 46,65,128 WITHOUT APPRECIATING THE FACT THAT THE SAME WAS ALL OWED BY THE LD. AO IN THE FINAL ASSESSMENT ORDER DATED 30 JULY 20 I 0 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. 8. ERRONEOUS LEVY OF INTEREST UNDER SECTION 220(2) OF THE ACT THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST OF RS. 2,75,32,130 UNDER SECTION 220(2) OF THE ACT. 9. INTEREST UNDER SECTION 234B 9.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST OF RS.3,25,49,736 UNDER SECTION 23 4B OF THE ACT. 17. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COU NSEL FOR THE ASSESSEE AND THE LD. DR. THE FIRST AND FOREMOST SUBMISSIONS OF THE LD. COUNS EL FOR THE ASSESSEE WAS ON EXCLUSION OF COMPANIES LISTED IN GROUND NO.2.2 FROM THE LIST OF COMPARABLES. IN THIS REGARD WE HAVE ALREADY SEEN THAT THE DRP WHEN IT PASSED ORDER DATED 17.06.2010 EXCLUDED THESE THREE COMPANIES FROM THE LIST OF NINE COMPARABLE CO MPANIES CHOSEN BY THE TPO. IN THE ORDER GIVING EFFECT TO THE DIRECTIONS OF THE DRP DA TED 16.03.2015 THESE COMPANIES WERE NEVER SOUGHT TO BE INCLUDED. IN OTHER WORDS, THE DR PS DIRECTIONS DATED 17.06.2010 WAS ACCEPTED BY THE REVENUE AND THE ASSESSEE AND HAD BE COME FINAL. THEREFORE THE AO WAS NOT JUSTIFIED IN ADDING THESE THREE COMPANIES AS CO MPARABLE COMPANIES WHILE GIVING DIRECTION TO THE DRP IN ITS ORDER DATED 16.03.2005. THEREFORE THESE THREE COMPANIES HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLE COM PANIES. WE ARE OF THE VIEW THAT THE STAND TAKEN BY THE ASSESSEE IN THIS REGARDS DESERVE S TO BE ACCEPTED. WE HAVE ALREADY SEEN IN THE NARRATION OF FACTS THAT THESE THREE COM PANIES CHOSEN BY THE TPO IN ITS FIRST ORDER DATED 30.10.2009 WAS HELD TO BE ERRONEOUS BY THE DRP IN ITS DIRECTIONS DATED 17.06.2010 AND THESE DIRECTIONS HAVE BECOME FINAL H AVING BEEN ACCEPTED BY THE REVENUE 16 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 16 AND THE ASSESSEE. THEREFORE IT WAS OPEN TO THE AO W HILE PASSING THE ORDER GIVING EFFECT TO THE DRP DATED 16.03.2015 TO CONSIDER THESE COMPA NIES AS COMPARABLE COMPANIES. WE THEREFORE DIRECT THE TPO/AO TO EXCLUDE THESE THR EE COMPANIES FROM THE LIST OF COMPARABLE COMPANIES. 18. THE NEXT ISSUE THAT NEEDS TO BE ADDRESSED I S AS TO WHETHER AFTEK ININFOSYS LTD., SHOULD BE CONSIDERED AS COMPARABLE COMPANY OR NOT. IN THIS REGARD WE FIND THAT THE OBJECTIONS BY THE ASSESSEE BEFORE THE DRP AFTER REM AND BY THE TRIBUNAL WAS THAT THIS COMPANY HAD IPR IN THE SCHEDULE OF FIXED ASSETS AND THEREFORE ITS BUSINESS MODEL WAS COMPLETELY DIFFERENT WHICH RENDERED THIS COMPANY AS NOT COMPARABLE WITH THE ASSESSEE FOR THE REASON THAT THE ASSESSEE DOES NOT HAVE ANY IPR IN THE SCHEDULE OF ITS FIXED ASSETS. ON THIS ISSUE WE FIND THAT THE DRP IN PARAGRAPH -13 OF ITS ORDER 16.03.2015 HAS ACCEPTED THAT THIS COMPANY NAMELY AFTEK INFOSYS LTD HAD SHOW N SIGNIFICANT IPRS BUT SINCE THE DETAILS OF THE NATURE AND PROFILE OF THE IPR WAS NO T AVAILABLE THIS COMPANY NEED NOT BE EXCLUDED. IN OUR VIEW WHEN THE FACT THAT THIS COMPA NY HAD SIGNIFICANT IPR S IS ACCEPTED AND THE FACT THAT THE ASSESSEE DOES NOT HAVE ANY IP R IS ALSO ACCEPTED THEN THAT DISTINGUISHING FEATURE ITSELF IS ENOUGH TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES. IN FACT IT WAS BROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE THAT IN A.Y.2009-10 THE DRP IN ITS DIRECTI ONS DATED 15.03.2016 HAS ACCEPTED THIS ASPECT AND EXCLUDED AFTEK INFOSYS LTD AS NOT C OMPARABLE WITH THAT OF THE ASSESSEE COMPANY. THE DRP HELD THAT AFTEK INFOSYS LTD WAS NO T COMPARABLE WITH THE ASSESSEE BECAUSE IT WAS FUNCTIONALLY NOT A COMPARABLE ENTITY NOR ON FAR IN VIEW OF THE DETAILS FILED BEFORE THE PANEL. THE FUNCTIONAL COMPARABILIT Y WAS ALSO CHALLENGED BY THE ASSESSEE ON THE GROUND THAT THIS COMPARABLE COMPANY OWNED SU BSTANTIAL IPRS AND THIS WAS ACCEPTED BY THE TRIBUNAL. IN THE LIGHT OF THE ABOV E DISCUSSION WE ARE OF THE VIEW THAT AFTEK INFOSYS LTD., SHOULD EXCLUDED FROM THE LIST O F COMPARABLE COMPANIES. WE HOLD AND DIRECT ACCORDINGLY. 17 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 17 19. THE NEXT GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS PROJECTED IN GROUND NO.3 OF ITS APPEAL. WE HAVE ALSO SEEN THAT DRP IN ITS DIRECTION DATED 16.03.2015 HAS HELD THAT SASKEN COMMUNICATION TECHNOLOGIES LTD HAS TO BE INC LUDED AS A COMPARABLE. THE TPO HAS EXCLUDED THIS COMPANY CHOSEN BY THE ASSESSEE FR OM THE LIST OF COMPARABLES. THE ONLY LIMITED PRAYER OF THE LD. COUNSEL FOR THE ASSE SSEE IS THAT THE DRP HAD GIVEN DIRECTION TO TAKE A PROFIT MARGIN AT THE SEGMENTAL LEVEL WHEREAS IT SHOULD BE TAKEN AT THE ENTITY LEVEL. IN THIS REGARD IT WAS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE TPO HIMSELF HAS TAKEN THE ENTITY LEVEL MARGINS IN A .Y.2007-08 TO 2009-10 AS FOLLOWS : ASSESSMENT YEAR MARGIN AS PER TPO ORDER PAPER BOOK PAGE REFERENCE 2007-08 13.37% 171 2008-09 16.88% 201 2009-10 17.51% 204 2010-11 19.95% 207 2011-12 20.91% 210 THUS GOING BY THE ABOVE, IT WAS SUBMITTED THAT THE CORRECTED COMPUTATION OF PROFIT MARGINS OF SASKEN AT AN ENTITY LEVEL SHOULD BE TAKE N AS GIVEN BELOW :- SASKEN TECHNOLOGIES LTD. AMT IN LAKHS ANNUAL REPORT (AR) MAR 2004 12 MONTHS PG NO.60 OF AR ANNUAL REPORT MAR 2005 12 MMONTHS PG NO.60 OF AR ANNUAL REPORT MAR 2006 12 MONTHS PG NO.71 OF AR/288 OF PB REVENUE 16,613.01 22,299.04 26,754.43 TOTAL REVENUE 16,613.01 22,299.04 26,754.43 TOTAL OPERATING COST COST OF REVENUES, INCLUDING RESEARCH AND DEVELOPMENT EXP. 9662.66 13181.43 19349.30 PRODUCT ENGINEERING EXPENSE 1553.71 2061.68 SELLING EXPENSES 1890.87 2146.69 2094.97 ADMINISTRATIVE AND GENERAL EXPENSES 1903.43 2856.21 3313.59 EMPLOYEE STOCK 15.63 73.70 53.59 18 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 18 OPTION COMPENSAITON COST (NET) OTHER EXPENSES - - - TOTAL OPERATING COST 15026.30 20,319.71 24,811.45 TOTAL OPERATING PROFIT 1,586.71 1,979.33 1,942.98 NCP%(ON COST) 10.56% 9.74% 7.83% IT WAS SUBMITTED THAT THE COMPUTATION FOR THE RELEV ANT YEAR, I.E. AY 2006-07 WAS ALSO SUBMITTED BEFORE DRP AND FORMS PART OF THE PAPER BO OK (PB ). IT WAS FURTHER SUBMITTED THAT THE TPO WHILE COMPUTING THE SEGMENTAL MARGIN I N THE ORDER HAS NOT ALLOCATED THE CORPORATE EXPENSES AND THAT HAS RESULTED IN ADOPT ING MARGINS THAT ARE SKEWED. IT WAS PRAYED THAT THE CORRECTED SEGMENTAL MARGIN OF SASKE N AS UNDER SHOULD BE TAKEN : SASKEN TECHNOLOGIES LTD. AMT IN LAKHS ANNUAL REPORT (AR) MAR 2004 12 MONTHS PG NO.86 OF AR ANNUAL REPORT MAR 2005 12 MONTHS PG NO.85 OF AR ANNUAL REPORT MAR 2006 12 MONTHS PG NO.101 OF AR/318 OF PB SEGMENT REVENUE SOFTWARE DEVELOPMENT AND SERVICES 12,378.43 18,905.47 24,003.42 SOFTWARE PRODUCTS 4,234.58 3,393.55 2,751.01 PROFIT BEFORE INTEREST AND TAX ( PBIT ) SOFTWARE DEVELOPMENT AND SERVICES 4,430.89 6,916.49 7,829.54 SOFTWARE PRODUCTS 1,159.55 411.20 (424.41) TOTAL PBIT 5,590.44 7,327.69 7,405.13 SEGMENT SOFTWARE DEVELOPMENT AND SERVICES 15.63 73.70 53.59 SEGMENT REVENUE 12,378.43 18,905.47 4,003.42 SEGMENT PBIT 4,430.89 6,916.49 7,829.54 NET ALLOCATED EXPENDITURE 2,994.67 4,534.55 4,900.51 SEGMENTAL NET PROFIT 1,436.22 2,381.94 2,929.03 19 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 19 TOTAL OPERATING COST 10,942.21 16,523.53 21,074.39 NCP% (ON COST) 13.13 14.42 13.90 20. AFTER CONSIDERING THE SUBMISSION OF THE LEAR NED COUNSEL OF THE ASSESSEE, WE ARE OF THE VIEW THAT THE PROFIT MARGIN AT THE ENTITY LEVEL OF THIS COMPARABLE COMPANY SASKEN OUGHT TO BE TAKEN AND NOT AT THE SEGMENTAL LEVEL. WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE THAT WITHOUT ALLOCATING CORPORATE EXPENSES THE MARGINS HAVE BE EN COMPUTED NEEDS VERIFICATION BY THE TPO/AO AND THE TPO/AO IS DIRECTED TO VERIFY THIS CLAIM AS GIVEN IN THE CHART ABOVE AND ALLOW THE SAME, IF THE FIGURES ARE FOUND TO BE CORRECT. 21. THE LAST AND FINAL SUBMISSION OF THE LD. COUNSEL FO R THE ASSESSEE IS WITH REGARD TO THE ADJUSTMENT TOWARDS WORKING CAPITAL AND RISK ADJUSTM ENT. IN THIS REGARD IT WAS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE TP O AGAIN IN A.Y.2004-05 IN ITS ORDER DATED 15.05.2006 HAS HIMSELF ALLOWED WORKING CAPITA L AND RISK ADJUSTMENT AT 2% AND SIMILAR ALLOWANCE OF SUCH ADJUSTMENTS IN THE PRESEN T ASSESSMENT YEAR SHOULD BE DONE. THE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TPO IN A.Y.2004-05 :- TAKING ALL THESE INTO ACCOUNT, THE COMPUTATION PRO VIDED BY THE TAX PAYER CANNOT BE ACCEPTED AS RELIABLE. HOWEVER IT IS NOT FAIR TO DEN Y THE BENEFIT OF ADJUSTMENT ALTOGETHER. HENCE, AN OVERALL ADJUSTMENT OF (-2%) IS GIVEN TOWA RDS WORKING CAPITAL LEVEL DIFFERENCES AND ALSO TOWARDS RISK LEVEL DIFFERENCES. 22. AFTER CONSIDERING THE SUBMISSIONS OF THE LE ARNED COUNSEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT SIMILAR ADJUSTMENTS SHOULD ALSO BE ALLOWED IN THE PRESENT ASSESSMENT YEAR. WE HOLD AND DIRECT ACCORDINGLY. WE ALSO OBSER VE THAT THE PRINCIPLE REASONS ASSIGNED BY THE DRP IN THE PRESENT ASSESSMENT YEAR WAS LACK OF DETAILS FURNISHED BY THE ASSESSEE. IN THIS REGARD WE FIND THAT ALL THE DETAI LS HAVE BEEN GIVEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND WE FIND THAT THE OBSERVA TIONS OF THE DRP IN THIS REGARD CANNOT BE SUSTAINED. WE ACCORDINGLY DIRECT THAT ADJUSTMENT OF 2% TOWARDS WORKING CAPITAL 20 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 20 ADJUSTMENT AND RISK ADJUSTMENT SHOULD BE ALLOWED TO THE ASSESSEE AS WAS DONE IN A.Y.2004-05. WE HOLD AND DIRECT ACCORDINGLY. 23. GROUND NO.5 RAISED BY THE ASSESSEE WILL NOT SU RVIVE BECAUSE OF THE RETROSPECTIVE AMENDMENT TO THE STATUTORY PROVISION OF SECTION 92C (2) OF THE ACT AND HENCE DISMISSED. 24. AS FAR AS GROUND NO.7 IS CONCERNED IT WILL BE JUST AND APPROPRIATE TO DIRECT THE AO TO VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGARD AND ALLOW APPROPRIATE RELIEF IF THE STAND TAKEN BY THE ASSESSEE IS FOUND TO BE CORRECT. GROU ND NOS. 8 AND 9 REGARDING LEVY OF INTEREST IS PURELY CONSEQUENTIAL AND THE AO IS DIRE CTED TO GIVE CONSEQUENTIAL RELIEF. 25. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 08.02.2017. SD/- SD/- [DR.ARJUN LAL SAINI] [ N.V.VASUDE VAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 08.02.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. PHILIPS INDIA LTD., 7, JUSTICE CHANDRA MADH AB ROAD, KOLKATA-700020. 2.D.C.I.T., CIRCLE-11(2), KOLKATA. 3. CIT(A)- KOLKATA. 4. CIT- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR, ITAT, KOLKATA BENCHES 21 ITA NO.1068/KOL/2015 M/S. PHILIPS INDIA LTD. A.YR.2006-07 21