2015 (1) TMI 300 - AT - Income Tax

Transfer pricing adjustment - Information Technology Enabled Services - Rejection of comparables - Genpact India ltd. - Held that - The TPO has included this comparable on the ground that the company is engaged in similar activity - the ratio of related party transaction to operating income for the year is 98.96% and does not satisfy the TPO s own filter of rejecting companies having more than 25% RPT - the turnover of Genpact India is ₹ 2683.82 crores as against assessee s turnover of ₹ 80.4 crores - the services rendered by Genpact india are high end services and even the turnover filter do not match with that of the assessee there was no error in the directions of the DRP to reject the company from the final list of comparables. Excel Infoways ltd. Super normal profit - Held that - This company has a super normal profit and showing margin of 203.80% - the TPO in its order u/s. 92CA(3) has himself removed this company from the final list of comparables giving reasons extreme outlier - Considering the super normal profit and also the rejection by the TPO in A.Y. 2010-11, there was no error in rejection of this company - the ratio of employee cost to turnover is only 10.02% as against assessee s employee cost of 62.83%. M/s. Crossdomain Solutions Ltd. Held that - This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services in M/s. Market Tools Research Pvt. Ltd. Versus Dy. Commissioner of Income-tax 2014 (9) TMI 43 - ITAT HYDERABAD it has been held that this company is providing services which are in the nature of KPO - the company is engaged in providing Niche services as well as developed its own brand Exdion to target the insurance industry in US - the directions made by the DRP is upheld for the rejection of this company from the final list of comparable - Decided against revenue. Nature of foreign exchange gain/loss Operating revenue or not Held that - While computing the operating margin of the assessee, the TPO included the foreign exchange loss of ₹ 2.48 crores as part of operating cost but has not considered the foreign exchange gain of ₹ 1.09 crores as part of the operating revenue - This amounts to inconsistent approach of the TPO thus, the TPO is directed to consider foreign exchange gain as part of the operating revenue while determining the operating margin of the assessee Decided partly in favour of revenue.

Summary

Issues: Transfer pricing adjustments, comparability analysis, rejection of comparables, operating margin adjustments, foreign exchange gain/loss treatment, working capital adjustment.

Transfer Pricing Adjustments:
The appeal by the Revenue and the cross objection by the assessee concern the Transfer Pricing Officer's adjustments to the international transactions of an Indian company providing ITES to its group companies. The TPO made adjustments to the processing services and purchase of office chairs transactions, leading to a total assessed income of Rs. 23,36,70,865.

Comparability Analysis:
The TPO applied the Transactional Net Margin Method (TNMM) for processing services and Comparable Uncontrolled Price Method (CUP) for office chairs. The TPO rejected certain comparables and made adjustments, resulting in a significant adjustment of Rs. 10,36,24,658 for processing services and an upward adjustment of Rs. 4,23,904 for office chairs.

Rejection of Comparables:
The Dispute Resolution Panel rejected and accepted various comparables introduced by the TPO. Notably, the DRP rejected 4 out of 12 additional comparables and denied the benefit of working capital adjustment and risk adjustment. The DRP also disagreed with the ALP computed by the assessee for office chairs.

Operating Margin Adjustments:
The TPO's approach to operating margins was questioned, leading to a directive to consider foreign exchange gain as part of operating revenue. The matter was remanded back to the TPO for verification of the working capital adjustment.

Foreign Exchange Gain/Loss Treatment:
Inconsistencies in the treatment of foreign exchange gain/loss were highlighted, directing the TPO to include foreign exchange gain as part of operating revenue while determining the operating margin.

Working Capital Adjustment:
The Tribunal directed the TPO to verify the working capital adjustment based on previous findings in the assessee's cases for A.Y. 2006-07 and 2007-08.

In conclusion, the Revenue's appeal was dismissed, and the matter was remanded back to the TPO for specific verifications. The cross objection filed by the assessee was treated as otiose following the dismissal of the Revenue's appeal.