2015 (7) TMI 473 - AT - Income Tax

Transfer pricing adjustment - exclusion of foreign exchange fluctuation gain/loss from the operating revenue/cost of the assessee as well as the comparables - Held that - TPO has computed PLI of the assessee as well as comparables by ignoring the amount of forex gain/loss, we set aside the impugned order and remit the matter to the file of TPO/AO to recompute the assessee s margin as well as that of the comparables by considering foreign exchange gain/loss as an item of operating revenue/cost. We want to make it clear that our finding in this regard is restricted to considering forex gain/loss from the transactions of the revenue nature as part of operating revenue/cost. If some part of forex gain/loss turns out to be relatable to transactions on capital accounts, then that part cannot be considered as part of operating revenue/cost. Similar view has been taken by the Tribunal in the assessee s own case for the immediately preceding assessment year, namely, 2009-10 Bank interest treated as non-operating - Held that - There is, as such, no bifurcation available of the bank interest and bank charges in the Annual accounts of the assessee. It is noticed that the assessee is not aggrieved against the treatment of bank interest as non-operating. We do not see much difference between the nature of bank charges and bank interest. As the amount of bank interest has been admitted as an item of non-operating expense, the amount of bank charges also assumes the same character as that of bank interest. In our considered opinion, both the bank charges as well as bank interest should have been considered as non-operating in the case of the assessee as well as comparables. The TPO is directed to verify whether the treatment of bank interest and bank charges in the case of the assessee s computation of ALP and that of the comparables is in accordance with our above observations. Needless to say, the assessee will be afforded a reasonable opportunity of being heard. Provision for doubtful advances taken as operating in assessee case and as non-operating in the case of the comparables - Held that - The assessee has not created any provision for doubtful debts . The only provision made by it is of doubtful advances . Both the provision for bad debts as well as doubtful advances are in the realm of the operations of the business. It is not the case of the either side that the assessee made any excess provision. In our considered opinion, the same has been rightly taken as an item of operating expense of the assessee. The TPO is directed to treat the amount of provisions for doubtful debts/advances as operating in the case of the comparables as well. Disallowance of risk adjustment - Held that - Ultimately risk is risk, whether it is of realization of invoices or of advances given for conducting operations. Since the aspects of incurring expenses and earning revenue are two sides of the same coin, we find that the existence of risk to the assessee cannot be denied. Be that as it may, it is further found that though there is no Provision for doubtful debts (arising from realization of invoices) during the year, but, the assessee did create provision for doubtful debts in the preceding year amounting to ₹ 10,79,665/-. This provision for bad debts is from the revenue side. To contend that the assessee was not running any risk in providing the services is, therefore, patently incapable of acceptance. Since the ld. AR has failed to objectively demonstrate the relatively higher risks undertaken by the comparables on an overall basis vis- -vis the assessee, we are disinclined to grant any risk adjustment. Selection of comparable - Accentia Technologies Ltd. - Held that - In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. TCS E-Serve International Ltd. - There is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature of software development, absent in the assessee s case). In the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of Transaction processing services . As such, the entity level figures render this company as unfit for comparison. Ergo, we order for the removal of this company from the final set of comparables. TCS e-Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/turnover have been brought to our notice. Consequently, we hold that the authorities below were justified in including this company in the list of comparables. i-Gate Global Solutions Sdn. Bhd. amalgamation took place with the approval of the members of the company on 12.8.2009 and subsequently sanctioned by the Hon ble High Court by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordinary financial event, which renders it unfit for comparison with the assessee company. Infosys BPO - Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. R. Systems International Ltd. (Seg.); Jindal Intelicom Pvt. Ltd.; and Caliber Point Business Solutions Ltd. - As amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then these companies should not be considered as comparable. CG-VAK Software and Exports Ltd. (Seg.) - The quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable.We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. Micro Genetics Systems Ltd. - We do not find any reason to exclude this company from the list of comparables merely on the ground that its turnover is less. The reasons given above while considering the comparability of CG-VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables. Axis IT & T Ltd. - The only reason given by the TPO for the exclusion of this company is its failing export filter. Relevant details of the figures of this company have not been made available. We, therefore, set aside the impugned order on this score and remit the matter to the file of TPO/AO for examining the functional comparability of this company. If this company is found to be similar on entity or segment level, then, the entity or the relevant segment should be included in the final set of comparables after due verification of the rate of operating profit margin etc. Thus we set aside the impugned order and remit the matter of determination of ALP of the international transaction of Provision of IT enabled data conversion services to the file of TPO/AO for a fresh decision. TP adjustment on account of interest to be charged on non-realisation of export proceeds - Held that - The argument that the Agreement does not provide for charging any interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act has been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving rise to such income In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon ble jurisdictional High Court in the case of Cotton Naturals (I) Pvt. Ltd. (2015 (3) TMI 1031 - DELHI HIGH COURT ), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations.

Summary

Issues Involved:
1. Transfer pricing adjustment for IT Enabled data conversion services.
2. Inclusion/exclusion of foreign exchange fluctuation gain/loss.
3. Classification of bank charges.
4. Treatment of provision for doubtful advances.
5. Risk adjustment.
6. Selection of comparables.
7. Interest on delayed/non-realization of export proceeds.

Detailed Analysis:

I. Transfer Pricing Adjustment for IT Enabled Data Conversion Services:
The appeal arises from the final assessment order passed by the AO, which included a transfer pricing adjustment of Rs. 20,48,76,996/- in the international transaction of 'Provision of IT Enabled data conversion services'. The assessee, a wholly owned subsidiary engaged in electronic data conversion, used the transactional net margin method (TNMM) to demonstrate that the transaction was at arm's length price (ALP). The TPO accepted TNMM but discarded multiple-year data, leading to a transfer pricing adjustment based on the arithmetic mean of nine comparable companies.

II. Foreign Exchange Fluctuation Gain/Loss:
The issue pertains to whether foreign exchange fluctuation gain/loss should be included in operating revenue/costs. The Tribunal found merit in the assessee's contention, citing that foreign exchange gain directly resulting from revenue transactions should be considered as operating revenue. The Tribunal referenced several cases, including ACIT Vs Prakash I. Shah and SAP Labs India Pvt. Ltd. Vs ACIT, supporting the inclusion of foreign exchange gain/loss as part of operating revenue/cost.

III. Bank Charges:
The assessee argued that bank charges should be considered non-operating expenses. The Tribunal agreed, noting no significant difference between bank interest (treated as non-operating) and bank charges. The TPO was directed to verify the treatment of bank interest and bank charges in accordance with these observations.

IV. Provision for Doubtful Advances:
The assessee contended that the TPO erred by treating provision for doubtful advances as operating expenses. The Tribunal held that both provision for doubtful debts and advances are operational expenses. The TPO was directed to treat these provisions as operating in the case of comparables as well.

V. Risk Adjustment:
The assessee argued for risk adjustment, claiming it bore no risk as a captive unit. The Tribunal noted that risk adjustment depends on the specific circumstances and the assessee must demonstrate that comparables bore relatively more risks. The Tribunal found the assessee did assume certain risks, including potential realization issues from its AE, and denied the risk adjustment due to the lack of objective demonstration by the assessee.

VI. Selection of Comparables:
The assessee challenged the inclusion of five companies and the exclusion of six. The Tribunal examined each disputed company:

- Accentia Technologies Ltd.: Excluded due to merger during the year.
- TCS E-Serve International Ltd.: Excluded due to involvement in technical services.
- TCS e-Serve Ltd.: Included as functionally comparable.
- i-Gate Global Solutions Sdn. Bhd.: Excluded due to amalgamation.
- Infosys BPO: Excluded due to acquisition during the year.

The Tribunal also remitted the matter of certain excluded comparables back to the TPO for verification of financial data alignment with the assessee's financial year.

VII. Interest on Delayed/Non-Realization of Export Proceeds:
The TPO added Rs. 5.86 crore for interest on delayed/non-realization of export proceeds. The Tribunal upheld the inclusion of interest on delayed payments as an international transaction, referencing the retrospective amendment to section 92B and relevant case law. The Tribunal directed the TPO to recompute the interest adjustment considering the contractual credit period and the currency in which the debt is denominated, following the principles laid out in Cotton Naturals (I) Pvt. Ltd.

Conclusion:
The appeal was allowed for statistical purposes, with directions for the TPO/AO to recompute the ALP and interest adjustments in accordance with the Tribunal's observations. The order was pronounced on 06.07.2015.