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2015 (8) TMI 652 - AT - Income TaxTransfer pricing adjustment - inclusion/exclusion of certain companies in/from the list of comparables - Held that - Cosmic Global Ltd. (Seg.) - the functional comparability of the Accounts BPO segment of Cosmic Global has been accepted by the ld. AR. In that view of the matter and respectfully following the judgment of the Hon ble High Court in the case of ChrysCapital Investment Advisors (I) Pvt. Ltd. (2015 (4) TMI 949 - DELHI HIGH COURT), we hold that Cosmic Global Ltd. (Seg.) cannot be excluded from the list of comparables. 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 have noticed above the judgment of the Hon ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in which it has been held that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. 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 the purposes of determination of the operating profit margin etc. Accentia Technologies Ltd. - apart from rendering IT enabled services, this company is also having software products and the revenue from both these streams has been merged. As the segmental figures in relation to the business of rendering ITES are not available and the TPO has taken its entity level figures, it ceases to be comparable. The obvious reason for the exclusion of this company is the pooling of income from software products in its overall profitability, which cannot be separated with precision, thereby rendering it incomparable. We, therefore, direct to remove this company from the list of comparables. e- Clerx Services Ltd.is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmations and settlements etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd., it is manifest that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services Ltd. cannot be considered as comparable. R. Systems International Ltd. (Seg.) - It is clarified that only if the assessee succeeds in providing the relevant data of this company for the concerned financial year on the basis of the information available from the Annual reports only, the TPO should include this company in the list of comparables by considering its OP/TC on the basis of the financial year ending 31.3.2009. If however, even though its quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then this company should not be considered as comparable. Treating foreign exchange difference as non-operating as against the assessee s treatment of operating cost - Held that - In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2010 (8) TMI 676 - ITAT, BANGALORE ) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011 (6) TMI 392 - ITAT BANGALORE ). Thus we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee s claim of operating cost. No separate adjustment was called for under the head interest as interest on receivables was subsumed in the working capital adjustment allowed as directed by DRP - Held that - TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. We, therefore, reject the reasoning given by the DRP in deleting the addition. However, in view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, we hold that the charging of interest on receivables is not sustainable on the extant facts.
Issues Involved:
1. Inclusion/Exclusion of Companies in/from the List of Comparables. 2. Treatment of Foreign Exchange Gain/Loss as an Item of Non-operating Nature. 3. Interest on Receivables as an International Transaction. Detailed Analysis: 1. Inclusion/Exclusion of Companies in/from the List of Comparables: The primary issue concerns the inclusion or exclusion of certain companies in/from the list of comparables for determining the Arm's Length Price (ALP) of international transactions. i) Cosmic Global Limited (Seg.): The assessee initially included Cosmic Global Ltd. in its list of comparables but later argued for its exclusion due to functional dissimilarity and low turnover. The Tribunal noted that the functional comparability of the Accounts BPO segment of Cosmic Global Ltd. was accepted. The Tribunal referenced the jurisdictional High Court's ruling in ChrysCapital Investment Advisors (I) Pvt. Ltd., which held that high profit or high turnover cannot be criteria for exclusion if the company is functionally similar. Therefore, Cosmic Global Ltd. (Seg.) was retained in the list of comparables. ii) CG-VAK Software and Exports Ltd. (Seg.): The TPO excluded this company based on its low turnover. However, the Tribunal emphasized that the quantum of turnover cannot be a reason for exclusion if the company is otherwise comparable. The Tribunal directed the inclusion of the ITES segment of this company in the list of comparables after verifying the necessary figures. iii) Accentia Technologies Ltd.: The TPO included this company as comparable, but the assessee challenged it due to the company's involvement in software products and lack of segmental figures. The Tribunal found that the pooling of income from software products rendered it incomparable and directed its exclusion from the list of comparables. iv) e-Clerx Services Ltd.: The TPO treated this company as comparable, but the Tribunal noted that it is a Knowledge Process Outsourcing (KPO) company with significant intangibles, making it functionally dissimilar to the assessee. The Tribunal directed its exclusion from the list of comparables. v) R. Systems International Ltd. (Seg.): The TPO excluded this company due to its different financial year ending. The Tribunal highlighted that comparability requires the same financial year data. The Tribunal remitted the matter to the TPO/AO to verify if the relevant data for the financial year could be deduced from the company's annual reports. If the data is available without apportionment or truncation, the company should be included in the list of comparables. 2. Treatment of Foreign Exchange Gain/Loss as an Item of Non-operating Nature: The second issue concerns the treatment of foreign exchange gain/loss as an operating or non-operating item. The Tribunal found merit in the assessee's contention that foreign exchange gain/loss related to trading items should be considered as operating revenue/cost. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah held that exchange rate fluctuation gain/loss arising from exports is an integral part of the export proceeds. The Tribunal also referenced the Bangalore Bench's ruling in SAP Labs India Pvt. Ltd. Vs ACIT, which held that foreign exchange fluctuation gain is part of operating profit. Therefore, the Tribunal held that the AO was not justified in considering forex loss as non-operating cost. 3. Interest on Receivables as an International Transaction: The third issue involves whether interest on receivables constitutes an international transaction. The TPO proposed a TP adjustment for delayed receipt of invoice values, treating interest on receivables as an international transaction. The Tribunal noted that the Finance Act, 2012, with retrospective effect from 1.4.2002, clarified that any debt arising during the course of business is an international transaction. The Tribunal referenced the Hon'ble Bombay High Court's ruling in CIT vs. Patni Computer Systems Ltd., which recognized delayed realization of invoices as an international transaction requiring ALP determination. The Tribunal found that the agreement between the assessee and its AE stipulated a maximum payment period of 60 days. Since all invoices were realized within this period, no separate interest could be charged. The Tribunal rejected the DRP's reasoning that interest on receivables was subsumed in the working capital adjustment, emphasizing that both transactions are separate and distinct. Conclusion: The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The matter was remitted to the TPO/AO for fresh determination of the ALP of the international transaction in conformity with the Tribunal's observations.
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