2017 (1) TMI 1623 - AT - Income Tax

TPA - comparable selection - Held that - In the light of submissions advanced by both the parties, if result in respect of three comparables viz. (i) Cambridge Technology Enterprises Ltd., (ii) Powersoft Global Solutions Ltd., (iii) SIP Technologies & Export Ltd. can be drawn corresponding to the financial year ending on March, 2006 then only these three comparables should be included otherwise they have to be excluded from the list of comparables. Similarly, in regard to Systemlogic Solutions Ltd., ld. TPO should examine the assessee s contentions, as noted above. If the same is found to be correct then to exclude this comparable from the list of comparables. In the result, this ground is allowed for statistical purposes in terms of aforementioned observations. Working capital adjustment - Held that - matter may be restored back to the file of ld. Assessing Officer/TPO for examining the assessee s plea and to allow the working capital adjustments. After hearing both the parties, this additional ground is admitted for examining the assessee s contentions. This ground is also allowed for statistical purposes. Comparable selection - Held that - From the TPO s order for the assessment year 2006-07, it is evident that Goldstone Technologies Limited and Computech Information Ltd. were included in the final list of comparables. However, no reason has been assigned for excluding these comparables from the final list of comparables for assessment year 2007-08. Unless any functional dissimilarity had arisen in assessment year 2007-08 in respect of these two comparables, which warranted exclusion of these two comparables, they should not have been excluded particularity in view of the principle of consistency. We, therefore, restore this matter to the file of the ld. Assessing Officer/ TPO to examine the assessee s contentions in the light of functional dissimilarity of these comparables and, if, the same are found to be in line with the assessee then these two comparables have to be included to the list of comparability. In the result, this ground is allowed for statistical purposes. Computation of Net Cost Plus ( NCP ) margin of selected comparable companies - Held that - We direct the ld. Assessing Officer/TOP to compute the operating income of assessee by including foreign exchange gain as operating income of assessee. Thus, this ground is allowed.

Issues Involved:
1. Inclusion of additional comparables in Transfer Pricing (TP) analysis.
2. Computation of operating margin and inclusion of other income.
3. Admission of additional grounds and evidence.
4. Working capital adjustment.
5. Consistency in inclusion/exclusion of comparables across different assessment years.
6. Treatment of foreign exchange gains/losses in operating income.

Issue-wise Detailed Analysis:

1. Inclusion of Additional Comparables in TP Analysis:
The assessee contested the inclusion of four additional comparables (Cambridge Technology Enterprises Ltd., Powersoft Global Solutions Ltd., SIP Technologies & Export Ltd., and Systemlogic Solutions Ltd.) by the Transfer Pricing Officer (TPO). The Tribunal directed that the financial results of these comparables should be aligned with the assessee’s financial year ending March 2006. If alignment is not possible, they should be excluded. For Systemlogic Solutions Ltd., the Tribunal instructed the TPO to verify if it was a subsidiary of Helios & Matheson Information Technology Ltd., which was already included, to avoid duplication.

2. Computation of Operating Margin and Inclusion of Other Income:
The assessee argued that the TPO did not consider other income, which was in the nature of operating income, while computing the margin. The Tribunal restored this issue to the Assessing Officer/TPO for verification, noting that the Department had considered such income as operating income in an Advance Pricing Agreement (APA).

3. Admission of Additional Grounds and Evidence:
The assessee sought to admit additional grounds and evidence under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963. The Tribunal admitted these additional grounds, citing the need for substantial justice and referencing the decision in Quark Systems India (P.) Ltd. The matter was restored to the Assessing Officer/TPO for examination.

4. Working Capital Adjustment:
The assessee requested a working capital adjustment, which had been allowed in the subsequent assessment year 2007-08. The Tribunal admitted this ground and restored it to the Assessing Officer/TPO for examination and appropriate adjustment.

5. Consistency in Inclusion/Exclusion of Comparables Across Different Assessment Years:
The assessee challenged the exclusion of VMF Soft Tech Ltd. and the inclusion of Helios & Matheson Information Technology Ltd. for the assessment year 2007-08, citing acceptance in the previous year. The Tribunal restored the matter to the Assessing Officer/TPO to verify if VMF Soft Tech Ltd. had outsourced its activity and to include it if not. Additionally, the Tribunal directed the Assessing Officer/TPO to examine the functional similarity of Goldstone Technologies Limited and Computech Information Ltd. and include them if consistent with the previous year.

6. Treatment of Foreign Exchange Gains/Losses in Operating Income:
The assessee contended that foreign exchange gains were considered non-operating income, while losses were treated as operating losses. The Tribunal directed the Assessing Officer/TPO to include foreign exchange gains as operating income, ensuring consistency with the treatment in other assessment years and the APA.

Conclusion:
The Tribunal’s judgment addressed multiple issues related to the inclusion of comparables, computation of operating margins, admission of additional grounds, working capital adjustments, and the treatment of foreign exchange gains/losses. The matters were largely restored to the Assessing Officer/TPO for re-examination and verification to ensure consistency and fairness in the assessment process. The appeals were partly allowed for statistical purposes.

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