2015 (11) TMI 1651 - AT - Income Tax

TPA - comparable - Held that - The assessee is a. company providing nondevelopment software services in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. Thus companies functionally dissimilar with that of assessee need to be excluded from final list of comarables. Forex gain/ loss treatment - Held that - DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules in any case were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export which was in US dollar. Therefore the entire receipts were on revenue account. This issue is squarely covered by the decision of the Hon ble Supreme Court in the case of Woodward Governor s (supra) wherein it has been held that forex gain/ loss in the revenue account is a trading receipt or as the case may be business expenditure allowable u/s 37(1) of the Act. We accordingly direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly. TP adjustment towards interest not realized from its AE on the debts arising during the course of business - Held that - Interest has to be determined as per US currency and not as per the prime lending rate as applied by TPO. Under such circumstance we set aside the impugned order and remit the matter to the file of TPO for fresh determination on account of TP adjustment towards interest not realized from its AE on the debts arising during the course of business.

Issues Involved:

1. Jurisdiction and validity of the assessment order.
2. Adjustment of Arm's Length Price (ALP) and the resultant addition.
3. Rejection of comparability analysis and search process.
4. Application of turnover filters.
5. Selection and exclusion of comparables.
6. Treatment of foreign exchange fluctuation.
7. Working capital adjustments.
8. Initiation of penalty proceedings.

Detailed Analysis:

1. Jurisdiction and Validity of the Assessment Order:
The appellant contended that the order passed by the DRP/TPO/AO was without jurisdiction, bad in law, and void ab initio. However, this ground was not pressed during the hearing and was dismissed as not pressed.

2. Adjustment of Arm's Length Price (ALP) and the Resultant Addition:
The TPO made an adjustment of Rs. 13.63 crore to the ALP, which was later rectified by the AO to Rs. 12.70 crore after considering the directions of the DRP. The primary contention was that the TPO erred in rejecting the comparability analysis conducted by the appellant and in applying certain filters resulting in the exclusion of functionally appropriate comparables.

3. Rejection of Comparability Analysis and Search Process:
The TPO rejected the comparability analysis conducted by the appellant and applied new filters to arrive at comparables. The DRP upheld the TPO's action, leading to the appellant's challenge.

4. Application of Turnover Filters:
The TPO applied a lower turnover filter of Rs. 5 crores, which was contested by the appellant. The Tribunal referred to the Delhi High Court decision in Chryscapital Investment Advisors (India) (P) Ltd. Vs. DCIT, which held that high or low turnover cannot be the sole basis for accepting or rejecting a comparable. The Tribunal opined that the turnover filter of Rs. 5 crores applied by the TPO was not correct and directed that comparables should be examined based on functional comparability.

5. Selection and Exclusion of Comparables:
Several comparables were contested by the appellant:
- Accentia Technologies Ltd.: Excluded due to an extraordinary financial event (amalgamation).
- TCS e-Serve International Ltd.: Excluded as it was engaged in software development services, unlike the appellant.
- TCS e-Serve Ltd.: Matter restored to AO for re-examination based on business characteristics.
- i-Gate Global Solutions: Excluded due to amalgamation during the year.
- Infosys BPO: Excluded due to acquisition during the year.
- CG VAK Software and Exports Ltd. & Micro Genetics Systems Ltd.: Directed to be included as comparables.

6. Treatment of Foreign Exchange Fluctuation:
The TPO treated foreign exchange gain/loss as non-operating. The Tribunal, however, directed that forex gain/loss should be treated as operating income/loss both for the tested party and comparables, following the Supreme Court decision in Woodward Governor's case and other relevant judgments.

7. Working Capital Adjustments:
The TPO made working capital adjustments using the SBI Prime Lending Rate. The Tribunal directed that the interest rate should be determined based on the currency of the transaction (US dollars) as per the Delhi High Court decision in Cotton Natural (P) Ltd. Vs. CIT.

8. Initiation of Penalty Proceedings:
The ground related to the initiation of penalty proceedings under section 271(1)(c) was considered premature and did not require adjudication.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing specific inclusions and exclusions of comparables, reconsideration of foreign exchange treatment, and working capital adjustments as per the guidelines and judicial precedents.

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