2018 (8) TMI 1922 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - 6 companies whose turnover was more than ₹ 200 crores were excluded from the list of comparable companies viz., Infosys Technologies Ltd., Larsen Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies and Tata Elxsi Ltd. Foreign exchange gain/loss relating to transactions of the relevant previous year alone - HELD THAT - Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non-operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise (AE) AND THE Assessee stated that for the specified products and services provided by the Assessee, it shall raise invoices on Ameriprise USA 2016 (3) TMI 1272 - DELHI HIGH COURT on the basis of a cost plus pricing methodology. The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non-operating cost. Adjustment on account of risk afresh - HELD THAT - We view that the issue requires re-examination by the TPO/AO. The order of DRP is set aside and the AO/TPO is directed to examine the adjustment on account of risk afresh. The assessee is directed to give the necessary details of the nature of risk and the impact on profit margins and also the basis of quantification of adjustment towards risk. Direct the AO to allow deduction u/s. 10A of the Act on the amount disallowed u/s. 40(a)(ia) of the Act. Giving credit for Advance Tax paid - HELD THAT - It would be just and appropriate to direct the AO to verify and give credit for advance tax paid, if the contention of the assessee is found to be correct. Deduction u/s.10A - HELD THAT - Whatever is excluded from the export turnover should also be excluded from the total turnover.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Inclusion of foreign exchange gain/loss as operating in nature.
3. Granting of risk adjustment.
4. Disallowance under section 40(a)(i) for non-deduction of TDS.
5. Deduction under section 10A on disallowed amounts.
6. Credit for advance tax and MAT credit.
7. Exclusion of expenses from export turnover and total turnover for section 10A deduction.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The assessee challenged the ALP determination and the consequent addition to total income for international transactions with its Associated Enterprise (AE). The assessee argued against the rejection of its comparables, the fresh transfer pricing analysis by the TPO, and the adoption of inappropriate filters. The TPO selected 13 comparables and computed an ALP leading to an addition of ?1,55,51,541. The DRP accepted the assessee's contention to exclude six companies based on turnover filters and directed the inclusion of foreign exchange gains/losses as operating income. The Tribunal upheld the exclusion of the five contested comparables based on functional dissimilarity with the assessee, following precedents set in similar cases.

2. Inclusion of Foreign Exchange Gain/Loss:
The DRP directed the inclusion of foreign exchange gain/loss as part of operating profit/loss, which was contested by the revenue. The Tribunal referred to the Hon’ble Delhi High Court's decision in Pr. CIT v. Ameriprise India Pvt. Ltd., which supported the inclusion of such gains/losses as operating in nature, thus dismissing the revenue's ground.

3. Granting of Risk Adjustment:
The DRP granted a 1% risk adjustment to the profit margin of the assessee and comparables. The revenue argued against a fixed or standard allowance for risk adjustment. The Tribunal directed the TPO/AO to re-examine the issue, requiring the assessee to provide necessary details about the nature and impact of risks and the basis for quantification of adjustments.

4. Disallowance under Section 40(a)(i):
The assessee faced disallowance of ?36,10,836 for non-deduction of TDS on WAN link charges and software license fees paid to non-residents. The assessee claimed these were reimbursements, a contention not accepted by the revenue authorities. The Tribunal, however, directed the AO to allow deduction under section 10A on the disallowed amount, making the issue tax neutral.

5. Deduction under Section 10A on Disallowed Amounts:
The Tribunal accepted the assessee's plea, supported by decisions of the Bombay and Gujarat High Courts, and CBDT Circular No.37/2016, that deduction under section 10A should be allowed on the amount disallowed under section 40(a)(i), thus making the addition tax neutral.

6. Credit for Advance Tax and MAT Credit:
The Tribunal directed the AO to verify and give credit for advance tax paid by the assessee, if found correct. It also directed the AO to provide consequential relief for MAT credit and interest under section 234B.

7. Exclusion of Expenses from Export Turnover and Total Turnover:
The DRP, following the Karnataka High Court’s decision in Tata Elxsi Ltd., directed that expenses excluded from export turnover should also be excluded from total turnover for section 10A deduction. The Tribunal upheld this direction, referencing the Supreme Court's affirmation in CIT v. HCL Technologies Ltd., dismissing the revenue's grounds.

Conclusion:
The Tribunal partly allowed the appeal of the assessee and the revenue, directing re-examination of risk adjustment and verifying advance tax credits while upholding the inclusion of foreign exchange gains/losses as operating income and allowing section 10A deductions on disallowed amounts. The Tribunal also upheld the exclusion of specific expenses from both export and total turnover for section 10A deduction, following jurisdictional High Court and Supreme Court decisions.