2015 (11) TMI 1582 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - 3D PLM Software Solutions Ltd.- TPO is directed to verify the related party transactions of 3D PLM and if the contention of the assessee, that the RPT of 3D PLM is more than 25%, is found to be correct, 3D PLM Software Solutions Ltd. will be excluded from the final set of companies comparable to the assessee Bodhtree Consulting Ltd. being a software product manufacturer, is not comparable to the assessee company. Genesys International Corporation Ltd. is engaged in the business of providing Geospatial Information System or GIS services, which comprises of photogrammetric remote sensing, cartography, data conversion related computer based services and other related computer based services and that, therefore, this company is also functionally not comparable to the assessee company. Genesys is engaged in the business of providing Geospatial Information System services, which is not at all the calling of the assessee. To reiterate, the assessee company is engaged in the business of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. As seen if the Forex gain and the first three comparables, i.e., 3D PLM, Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. are excluded, the OP/OC of the remaining nine comparable companies, as taken by the TPO, works out at 19.56%, as against the assessee s OP/OC of 18.15%, which falls within the /- 5% range, as provided in the proviso to section 92C(1) of the Act. Therefore, we find no need to go into the merits of the comparability of the remaining two companies, i.e., Cosmic Global Ltd. and Infosys Ltd. and we are not doing so. deduction u/s 10A computation - Held that - Net foreign exchange fluctuation gain booked by the assessee in its books of account is directed to be included in the export turnover for computing deduction u/s 10A of the Act. For computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. Therefore, the assessee is correct in contending that an equivalent amount of foreign exchange gain attributable to the delivery of goods outside India, as included in the total turnover by the AO, is also entitled to be included in the export turnover for proper computation of the deduction u/s 10A of the Act.

Issues Involved:

1. Treating foreign exchange as non-operating in nature.
2. Systematic exclusion of comparable companies identified by the Appellant.
3. Systematic inclusion of additional comparable companies which are functionally different.
4. Inclusion of pass-through cost in the cost base.
5. Rejecting the use of multiple-year data.
6. No working capital risk adjustment granted.
7. Granting of benefit of +/- 5 percent range.
8. Non-applicability of the provisions of Chapter X of the Act to the Appellant.
9. Exclusion of unrealized foreign exchange for determining the deduction under section 10A.
10. Exclusion of realized foreign exchange gain from Export Turnover but included in Total Turnover.
11. Levy of Interest by AO.

Detailed Analysis:

1. Treating foreign exchange as non-operating in nature:
The Dispute Resolution Panel (DRP) and Transfer Pricing Officer (TPO) excluded the foreign exchange gain of INR 15,99,29,779 from the operating revenue, treating it as non-operating. The Appellant argued for its inclusion in operating income, citing consistency with previous years and various judicial precedents. The Tribunal remitted the matter to the TPO for fresh consideration, emphasizing the need for detailed verification in line with the "Techbook International" decision.

2. Systematic exclusion of comparable companies identified by the Appellant:
The DRP and TPO excluded Computech International Ltd., Kaashyap Technologies Ltd., SIP Technologies & Exports Ltd., R Systems International Ltd., and Roita India Ltd. from the final set of comparables. The Tribunal directed the TPO to verify the related party transactions of 3D PLM Software Solutions Ltd. and excluded Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. due to functional dissimilarities. The Tribunal did not delve into Cosmic Global Ltd. and Infosys Ltd. as the remaining comparables fell within the permissible range.

3. Systematic inclusion of additional comparable companies which are functionally different:
The TPO included Geneysys International Corporation Ltd., Infosys Technologies Limited, KALS Information Systems Ltd., and Persistent Systems Ltd. in the final set of comparables. The Tribunal found these companies functionally different from the Appellant, which primarily provides low-end software development services. The Tribunal excluded these companies from the final set of comparables.

4. Inclusion of pass-through cost in the cost base:
The TPO and DRP included outsourcing third-party service costs of INR 7,95,55,035 in the cost base. The Tribunal found that these costs were pass-through and should not be considered in the cost base for calculating the Profit Level Indicator (PLI).

5. Rejecting the use of multiple-year data:
The TPO and DRP rejected the use of multiple-year data for justifying the Arm's Length Price (ALP). The Tribunal did not specifically address this issue separately, implying no change in the TPO/DRP's stance.

6. No working capital risk adjustment granted:
The TPO and DRP did not grant a further downward margin adjustment for working capital risk differentials. The Tribunal did not specifically address this issue separately, implying no change in the TPO/DRP's stance.

7. Granting of benefit of +/- 5 percent range:
The Tribunal noted that after excluding certain comparables, the Appellant's margin fell within the +/- 5% range, thus requiring no adjustment.

8. Non-applicability of the provisions of Chapter X of the Act to the Appellant:
The Tribunal did not specifically address this issue separately, implying no change in the TPO/DRP's stance.

9. Exclusion of unrealized foreign exchange for determining the deduction under section 10A:
The AO excluded unrealized foreign exchange gain of INR 3,75,69,434 from the profits of the business for deduction under section 10A. The Tribunal directed the inclusion of this gain in the export turnover for computing the deduction, following the Supreme Court's decision in "Woodward Governor India (P) Ltd."

10. Exclusion of realized foreign exchange gain from Export Turnover but included in Total Turnover:
The AO included realized foreign exchange gain of INR 9,68,96,182 in the total turnover but not in the export turnover. The Tribunal held that for computing deduction under section 10A, the total turnover and export turnover must be read similarly, thus directing the inclusion of the gain in the export turnover.

11. Levy of Interest by AO:
The Tribunal did not specifically address this issue separately, implying no change in the AO's stance.

Separate Judgments:
The Tribunal's decisions were consistent across both assessment years 2009-10 and 2010-11, with similar issues being addressed similarly. The Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals, providing detailed directions for remitting certain matters to the TPO for fresh consideration.

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