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2014 (4) TMI 615 - AT - Income TaxSelection of comparables - Confirmation of use of filters Comparative analysis Held that - The assessee s contention that it is functionally different, cannot hold much water - Be that as it may, fact however remains that M/s Infosys Technologies Limited is a giant in the field of software development services having considerable brand value, it also assumes all the risks related to the business - the turnover of Infosys Technologies during the year is about Rs.13000 crores as against Rs.32 crores of the assessee - This itself makes Infosys Technologies Limited uncomparable to the assessee - When the Assessing Officer is applying the turnover filter by adopting a lower limit of Rs.1 crore, he should also have fixed an upper limit while applying the turnover filter - Infosys Technologies Limited cannot be considered to be a comparable to the assessee Relying upon CIT v. Agnity India Technologies (P.) Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT - big companies like Infosys cannot be treated as comparable to small captive service providers like the assessee thus, the AO/TPO is directed to exclude M/s Infosys Technologies Limited from the list of comparables for determining the ALP Decided partly in favour of Assessee. The assessee has placed the annual reports of the companies, the TPO should have considered the same and should not have rejected on the ground of non-availability of data in public domain - If information relating to the companies are available with the TPO and if the companies satisfy the filter applied by the TPO then there is no justification for rejecting the companies as comparables thus, the matter is remitted back to the TPO for fresh adjudication Decided in favour of Assessee. Mahindra Consulting Limited Held that - Assessee contended that as per the annual report of the assessee, there is no related party transactions and whatever related party transactions are there are between the subsidiary company and other companies and not with the assessee company thus, the matte is required to be remitted back to the TPO to ascertain as to whether actually there is any related party transaction and if at all there is any related party transaction whether they exceeded 25% threshold limit of related party transaction to turnover filter adopted by the TPO Decided in favour of Assessee. Inclusion of bad debts in operating costs Computation of margin of the companies Held that - The TPO had computed the net profit margin of the company at 72.38% - During the appeal proceedings before the CIT (A), the assessee specifically objected to the profit margin adopted at 72.38% of VMF Softech Limited by contending that bad debts and provision for bad debts and advances should be considered as part of the operating cost - the CIT (A) in the order passed by him did not accept the net profit margin worked out to 4.37% by the TPO by observing that the computation made by the TPO is erroneous and himself proceeded to compute the net profit margin at 71.99% - the CIT (A) has not given any reason why the computation made by the TPO in the remand report is erroneous thus, the matter is remitted back to the TPO for fresh adjudication Decided in favour of Assessee. Exclusion of foreign fluctuations from operating income Held that - The decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD followed - The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business - foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee - The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company - even for the year under appeal also the same principle should be applied, and while computing the margin for determining the ALP for the assessment year under appeal, the foreign exchange gain/loss has to be taken as part of the operating margin the AO/TPO is directed to treat the foreign exchange fluctuation gain/loss as part of operating income of the comparable companies for computing the net margin Decided partly in favour of Assessee.
Issues Involved:
1. Selection/Rejection of Comparables 2. Computation of Margins 3. Inclusion of Bad Debts in Operating Costs 4. Exclusion of Foreign Exchange Fluctuations from Operating Income Detailed Analysis: 1. Selection/Rejection of Comparables: - Infosys Technologies Limited: The assessee objected to the inclusion of Infosys Technologies Limited as a comparable due to its extraordinarily high turnover of Rs. 13000 crores compared to the assessee's Rs. 32 crores. The Tribunal agreed, stating that Infosys is a giant in the field with considerable brand value and assumes all business risks, making it incomparable to the assessee. The Tribunal directed the Assessing Officer/TPO to exclude Infosys Technologies Limited from the list of comparables. - Bangalore Softsell Limited: The TPO excluded this company based on the RPT filter of more than 25% of sales, including reimbursement transactions. The Tribunal found merit in the assessee's contention that reimbursements should not be considered in the turnover while computing the RPT percentage. The Tribunal directed the TPO to reconsider this comparable after verifying the nature of reimbursements. - Cherrysoft Technologies Limited and Future Software Limited: These companies were rejected by the TPO due to non-availability of data in the public domain. The Tribunal directed the TPO to reconsider these companies as comparables since the assessee had provided their annual reports. - Mahindra Consulting Limited: The TPO and CIT (A) rejected this company based on related party transactions exceeding 25% of sales. The Tribunal directed the TPO to re-examine this issue afresh, considering the assessee's claim that there were no related party transactions. 2. Computation of Margins: - The Tribunal addressed the issue of the CIT (A) not accepting the TPO's remand report, which correctly computed the net profit margin of VMF Softech Limited at 4.37%. The CIT (A) had instead determined the margin at 71.99% without providing reasons for rejecting the TPO's computation. The Tribunal remitted the issue back to the TPO for fresh determination. 3. Inclusion of Bad Debts in Operating Costs: - The assessee contended that bad debts and provisions for bad debts should be included in the operating costs for computing margins. The Tribunal noted that bad debts are incurred in the normal course of business and should be considered part of the operating costs. The Tribunal directed the TPO to re-examine this issue afresh. 4. Exclusion of Foreign Exchange Fluctuations from Operating Income: - The Tribunal held that foreign exchange fluctuations arise in the normal course of business and should be included in the operating income for computing net margins. This view was supported by various decisions of co-ordinate benches of the Tribunal. The Tribunal directed the Assessing Officer/TPO to treat foreign exchange fluctuation gains/losses as part of the operating income of the comparable companies. Conclusion: The appeal was allowed in part, with directions for the TPO to re-examine several issues afresh, including the selection of comparables, computation of margins, inclusion of bad debts in operating costs, and the treatment of foreign exchange fluctuations as part of operating income. The Tribunal emphasized the need for a fair and accurate determination of the Arm's Length Price (ALP) by considering all relevant factors and data.
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