2018 (2) TMI 1890 - AT - Income Tax

TP Adjustment - selection of comparable - as per CIT-A 0% RPT filter should be applied - HELD THAT - We find from the order of TPO that application of RPT of more than 25% was applied by TPO as well as the assessee-company. Therefore, the ld.CIT(A) was not justified in excluding the above companies by applying 0% of RPT filter. Accordingly, this ground of appeal filed by the revenue is allowed. Companies having abnormal profits - Companies making super profits or losses cannot by ipse facto reason to exclude the companies from the list of comparables. See QUARK SYSTEMS PVT. LTD. 2009 (10) TMI 591 - ITAT, CHANDIGARH M/s.Infosys Technologies cannot be considered as a comparable on the ground of brand value. Accordingly, we uphold the finding of the ld.CIT(A) to exclude this company from the list of comparables. Foreign exchange gain arising out of sale proceeds received from AE constitutes part of operating income - we remand this issue to the file of the AO/TPO to re-compute the margin of the assessee by treating foreign exchange gain as part of operating income and also compute profit margins of the comparable entities by treating foreign exchange gain as operating income. This ground of appeal filed by the revenues is partly allowed for statistical purposes. Deduction of 5% from arms length as standard deduction - HELD THAT - This issue is covered by the decision of the co-ordinate bench of Tribunal in the case of addition of the code adventure of the table in the case of Tatra Vectra Motors Ltd. vs. Dy.CIT 2012 (4) TMI 359 - ITAT BANGALORE in favour of the assessee-company as find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of /5% to compute ALP in terms of the erstwhile proviso to section 92C(2) Exclusion of companies on functional dissimilarities - Additional grounds of cross objections - HELD THAT - We find that there is no finding either by the ld.CIT or by the TPO on functional differences vis- -vis tested party. Since the relevant information is not on record we deem it fit to admit the additional ground of appeal and set aside the issue to the file of the TPO to decide the issue of comparability on functional differences

Summary

Issues Involved:
1. Application of Related Party Transactions (RPT) filter.
2. Exclusion of companies with abnormal profits.
3. Exclusion of companies based on size, turnover, and brand value.
4. Treatment of foreign exchange gains or losses.
5. Standard deduction of 5% from the Arm's Length Price (ALP).
6. Exclusion of certain companies based on functional dissimilarities.

Detailed Analysis:

1. Application of Related Party Transactions (RPT) Filter:
The CIT(A) applied a 0% RPT filter, excluding companies with any related party transactions. The Tribunal found this application inappropriate, noting that both the assessee and the TPO had applied a 25% RPT filter. The Tribunal allowed the revenue's appeal, reinstating the companies that were excluded by the CIT(A) based on the 0% RPT filter.

2. Exclusion of Companies with Abnormal Profits:
The CIT(A) excluded companies with abnormal profits from the list of comparables. The Tribunal, referencing the case of Mentor Graphics (Noida) (P.) Ltd. vs. Dy.CIT and the Special Bench decision in DCIT vs. Quark Systems (P) Ltd., stated that making super profits or losses alone is not a sufficient reason to exclude companies from the list of comparables. This ground of the revenue's appeal was allowed.

3. Exclusion of Companies Based on Size, Turnover, and Brand Value:
The CIT(A) excluded M/s. Infosys Technologies Ltd. due to its high turnover and brand value. The Tribunal upheld this exclusion, citing the case of M/s. NTT DATA Global Delivery Services Ltd. vs. Asst. CIT, where it was held that Infosys, being a giant in software development with high intangibles and goodwill, is not comparable to a captive unit like the assessee. Thus, the Tribunal dismissed the revenue's appeal on this ground.

4. Treatment of Foreign Exchange Gains or Losses:
The CIT(A) included foreign exchange gains or losses as part of the operating profit. The Tribunal agreed, referencing the case of Rusabh Diamonds vs. Asst.CIT, which held that foreign exchange gains or losses arising from trade receivables or payables should be treated as part of operating income. The issue was remanded to the AO/TPO for re-computation.

5. Standard Deduction of 5% from the Arm's Length Price (ALP):
The CIT(A) allowed a standard deduction of 5% from the ALP. The Tribunal upheld this decision, referencing the case of Tatra Vectra Motors Ltd. vs. Dy.CIT, which confirmed that the benefit of +/- 5% adjustment is available to the assessee for computing ALP. The revenue's appeal on this ground was dismissed.

6. Exclusion of Certain Companies Based on Functional Dissimilarities:
The assessee raised cross-objections, seeking the exclusion of Visualsoft Technologies Ltd. and Four Soft Ltd. based on functional dissimilarities. The Tribunal admitted the additional ground of appeal and remanded the issue to the TPO for a determination on the functional differences of these companies.

Conclusion:
The Tribunal partly allowed the revenue's appeal and partly allowed the assessee's cross-objections for statistical purposes. The key issues revolved around the application of RPT filters, exclusion of companies with abnormal profits, treatment of foreign exchange gains, and the standard deduction from ALP. The Tribunal's decisions were guided by precedents and the need for consistency in applying transfer pricing regulations.