2017 (7) TMI 1335 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is into software development services provider thus companies functionally with that of assessee need to be deselected from final lit. When there is no change in the business activity of assessee for the year under consideration as well as in the functions of the said company then in view of the earlier order of this Tribunal in assessee's own case we hold that this company cannot be considered as a good comparable of the assessee and accordingly, the TPO/AO is directed to exclude the same from the set of comparables. Since we have directed the TPO/AO to exclude certain companies from the set of comparables in both segments, therefore the ALP has to be computed on the basis of the remaining comparables. We may clarify that in Sales Marketing Support Service Segment, only one company is left in the list and therefore the TPO has to consider the benefit of second proviso to Section 92C and decide the same as per law. Deduction u/s 10A - HELD THAT - The term export turnover is defined in clause (iv) of Expln. 2 inserted at the end of section 10A and provides that the expenditure on freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India are required to be excluded from the consideration in respect of export brought into India. The expenditure if any incurred in foreign exchange in providing technical services outside India is also to be excluded from the consideration in respect of export of the undertaking. Thus if the expenditure in question is not falling in the category of charges of freight, telecommunication charges or insurance and it has been incurred in the foreign exchange then only when this expenditure is incurred in providing the technical services outside India, the same has to be excluded as per the definition provided under Explanation 2(iv) inserted at the end of Section 10A. Accordingly, we set aside this issue to the record of Assessing Officer for limited purpose of verification of the nature of expenditure and in case it is not for freight, telecommunication charges or insurance then the same cannot be excluded except it is incurred for providing the technical service outside India. Foreign exchange fluctuation gain/loss - HELD THAT - As considered the relevant material on record. If the foreign exchange fluctuation gain or loss is arising on account of realization of export turnover then the same is in the nature of operating revenue or loss. Therefore we do not find any error or illegality in the order of the DRP in deciding this issue and holding that the same is operating in nature.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Principles of natural justice.
3. Transfer pricing adjustments.
4. Selection and rejection of comparables.
5. Computation of Arm's Length Price (ALP).
6. Risk adjustments.
7. Exclusion of certain expenditures from export turnover.
8. Treatment of foreign exchange fluctuation.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order was "bad in law" and disregarded the principles of natural justice. The Tribunal did not explicitly address these general grounds, focusing instead on specific transfer pricing and computation issues.

2. Principles of Natural Justice:
The assessee argued that the order was passed without adhering to the principles of natural justice. However, the Tribunal's focus remained on the substantive issues of transfer pricing and comparability.

3. Transfer Pricing Adjustments:
The assessee challenged the transfer pricing adjustments of ?4,93,98,250/- and the reference to the Transfer Pricing Officer (TPO) for determining the arm's length price. The Tribunal examined the comparability of companies selected by the TPO and the Dispute Resolution Panel (DRP).

4. Selection and Rejection of Comparables:
- Software Development Segment:
- The TPO selected 13 companies, and the DRP rejected 10 of these. The Tribunal restored three companies (Evoke Technologies Pvt. Ltd., Mindtree Limited (Seg.), and R S Software (India) Limited) to the set of comparables based on the assessee's non-objection.
- The Tribunal excluded six companies (Acropetal Technologies Ltd., E-Zest Solutions Ltd., L&T Infotech Ltd., Persistent Systems and Solutions Ltd., Persistent Systems Ltd., and Tata Elxsi Ltd.) based on functional dissimilarity and lack of segmental data.
- E-Infochips Limited and Sasken Communication Technologies Ltd. were excluded due to their involvement in software products and lack of segmental data, as confirmed by the Delhi High Court in the Saxo India case.

- Sales and Marketing Support Segment:
- The TPO selected three companies, and the DRP rejected one (ICC International Agencies Limited). The Tribunal upheld the exclusion of ICC International Agencies Limited due to its trading activities and incorrect margin computation.
- The Tribunal excluded Asian Business Exhibition & Conferences Limited, citing its functional dissimilarity with the assessee's sales and marketing support services.

5. Computation of Arm's Length Price (ALP):
The Tribunal directed the TPO/AO to recompute the ALP based on the remaining comparables after exclusions. In the Sales & Marketing Support Service segment, only one company remained, prompting the TPO to consider the benefit of the second proviso to Section 92C.

6. Risk Adjustments:
The assessee argued for risk adjustments, stating it was insulated from risks compared to the comparables. The Tribunal did not provide a specific ruling on this issue but focused on the selection of appropriate comparables.

7. Exclusion of Certain Expenditures from Export Turnover:
The assessee challenged the exclusion of internet charges and travel expenses from export turnover. The Tribunal set aside this issue for verification by the Assessing Officer, directing that only expenditures related to freight, telecommunication, insurance, or technical services provided outside India should be excluded.

8. Treatment of Foreign Exchange Fluctuation:
The revenue's ground regarding the treatment of foreign exchange fluctuation gain/loss was addressed. The Tribunal upheld the DRP's decision that foreign exchange fluctuation related to export turnover should be considered operating in nature.

Conclusion:
The Tribunal's judgment involved a detailed analysis of the selection and rejection of comparables for transfer pricing purposes, the computation of ALP, and the treatment of specific expenditures and foreign exchange fluctuations. The Tribunal directed the TPO/AO to recompute the ALP based on the revised set of comparables and provided specific guidelines for the inclusion/exclusion of certain expenditures from export turnover. Both the assessee's and revenue's appeals were partly allowed, reflecting a balanced approach to the issues raised.