2016 (2) TMI 916 - AT - Income Tax

Foreign exchange loss/gain treated as non-operating selection of comparables - Held that - Perusal of the functions of the assessee as mandated by the agreement on 1st day of October, 2006 demonstrates that the assessee is not a normal service provider nor a ITES company. The assessee requires skill, capability as well as expertise in a particular filed of procurement and manufacturing for performing the functions referred above. The assessee is required to perform functions including, quality control services, providing technical services with respect to the products and aid the manufacturers of the products, provide guidance to the manufacturers with respect to acquisition of raw material, randomly inspect relevant factory conditions etc. In other words the assessee is offering a comprehensive range of procurement related advisory services including quality control etc. Thus Apitco Ltd, Global Procurement Consultants Ltd., Quippo Valuers and Auctioneers Private Limited and TSR Darashaw Ltd are directed to be excluded as a comparable. Treating foreign exchange loss/gain as non-operative - Held that - On observing the functional profile of the assessee, we are inclined to agree with the contentions of the assessee that the foreign exchange loss/profit is an operating loss, if the transaction on which it arose is connected with the core business/services being rendered by the assessee. This aspect needs examination. Thus we deem it appropriate to set aside the issue to the file of the AO for denovo adjudication in accordance with law.

Issues Involved:
1. Addition to the total income on account of adjustment in the arm's length price (ALP) of international transactions related to business support services.
2. Classification of the functions of the assessee as providing high-value services.
3. Acceptance of the economic analysis undertaken by the appellant.
4. Adjustment under Section 92CA(3) without finding any specified circumstances.
5. Rejection of certain comparable companies identified by the appellant.
6. Use of single-year data instead of multiple-year data.
7. Selection of companies with super-normal profits as comparables.
8. Treatment of foreign exchange loss/gain as non-operating.

Detailed Analysis:

1. Addition to the Total Income on Account of ALP Adjustment:
The assessee contested the addition of INR 2,18,26,570 to its total income due to the adjustment in the ALP of international transactions related to business support services with its associated enterprises (AEs). The Transfer Pricing Officer (TPO) had proposed an adjustment of INR 2,63,83,909, which was later reduced by the Assessing Officer (AO) to INR 2,18,26,570 following the Dispute Resolution Panel's (DRP) order.

2. Classification of Functions as High-Value Services:
The TPO classified the services provided by the assessee as high-value, including market support, managerial, and technical support services. This classification was based on the qualifications and salary structure of the employees. The TPO held that the assessee was not a routine service provider and rejected the contention that comparable companies providing high-end services should not be selected.

3. Acceptance of Economic Analysis:
The assessee argued that the revenue authorities did not correctly appreciate its functional profile, asserting that it was not an ITES company but a normal service provider. The functional profile included providing support services to its parent company, Adidas Sourcing Ltd., in connection with sourcing services for Adidas Group entities, involving regular inspections and advisory services.

4. Adjustment Under Section 92CA(3) Without Specified Circumstances:
The assessee contended that the adjustment under Section 92CA(3) was made without returning a finding about the existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of Section 92C of the Act.

5. Rejection of Certain Comparable Companies:
The TPO and DRP rejected some comparable companies selected by the assessee, such as Ma Foi Management Consultants Ltd and Ma Foi Global Services, due to different accounting years or financial statements for a period other than 12 months. Additionally, the TPO included other companies like Apitco Ltd., Global Procurement Consultants Ltd., and TSR Darashaw Ltd. as comparables, which the assessee contested.

6. Use of Single-Year Data:
The revenue authorities used single-year data instead of multiple-year data to determine the arm's length margins/prices, which the assessee argued was not available at the time of complying with the Transfer Pricing documentation requirements.

7. Selection of Companies with Super-Normal Profits:
The assessee argued that the TPO/DRP erred in selecting companies with super-normal profits, such as Apitco Ltd., Global Procurement Consultants Ltd., and TSR Darashaw Ltd., as comparables.

8. Treatment of Foreign Exchange Loss/Gain:
The TPO/DRP treated foreign exchange loss/gain as non-operating, which the assessee contested. The assessee argued that foreign exchange gain/loss should be treated as operating profit/loss, citing various case laws to support this contention.

Separate Judgments:

Functional Profile and Comparables:
The Tribunal held that the assessee's functional profile demonstrated that it was not a normal service provider or an ITES company but required skill, capability, and expertise in procurement and manufacturing advisory services. The Tribunal directed the exclusion of Apitco Ltd., Global Procurement Consultants Ltd. (due to lack of segmental data), Quippo Valuers and Auctioneers Pvt. Ltd., and TSR Darashaw Ltd. from the list of comparables due to differences in functional profiles.

Foreign Exchange Loss/Gain:
The Tribunal agreed with the assessee's contention that foreign exchange loss/profit should be treated as an operating loss/profit if related to the core business/services. The issue was remanded to the AO for de novo adjudication in accordance with the propositions laid down by the Tribunal in the cited cases.

Conclusion:
The appeal of the assessee was allowed in part, with specific directions to exclude certain comparables and reconsider the treatment of foreign exchange loss/gain. The Tribunal emphasized the need for accurate functional analysis and appropriate selection of comparables in transfer pricing cases.

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