2017 (1) TMI 1705 - AT - Income Tax

TP Adjustment - Selection of comparables - forex gain/loss form part of the operating margin of the assessee - HELD THAT - The undisputed facts are that TNMM method has been used to benchmark the TP transactions by using data of impugned assessment year. After applying the various filters, TPO arrived at two comparables, the average PLI of which stood at 36.02% which resulted into impugned additions. Rule 10B(1)(e) deals with TNMM method which calls for suitable adjustment to net profit margins to make the two data comparable. We are unable to accept the contention of the Ld. DR that suitable adjustments could be made only in the margins of comparables and not in the margins of the Tested Party. Without making suitable adjustments in the margin, proper comparison could not be drawn. We find that the in case law relied upon by Ld. DR, the Tribunal had many alternative reason not to tinker with the PLI of the tested party. Issue of treatment of forex gain / loss is now well settled by various judicial pronouncements and more specifically in judgments relied upon by assessee, wherein it has been held that forex gain/loss form part of the operating margin of the assessee as well as comparables. Further, we find that the assessee suffered net forex loss in AY 2010-11 and reflected the same as part of operating expenses under Schedule-12 which gives strengths to the arguments of Ld. AR. Since TPO has excluded forex gain / loss from operating margin, the same is not in line with these judicial pronouncements. Therefore, we find that matter is pure legal issue and do not raise any fresh issue and do not require investigation of additional facts and hence admit the same for adjudication by following apex court judgment in National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT Sole comparable left out was selected by the TPO himself and not by the assessee and this comparable was never disputed before DRP and DRP also did not find the same as non-comparable. Hence, at this stage it would be very difficult to accept this plea of Ld. DR to undo the comparable selected by the revenue and never challenged at any stage. However, we are of the considered opinion that proper benchmarking of the margin is not possible with this single comparable and therefore, on the peculiar facts and circumstances, we are inclined to restore the matter back to the file of AO/TPO to undertake TP study afresh by taking robust comparables after providing adequate opportunity of being heard to the assessee. As already held by us in preceding paragraphs, forex gain/loss shall for part of operating operations and suitable adjustments, as statutorily admissible, shall be made in TP study. We restore the matter back to the file of AO/TPO to undertake TP study afresh after providing adequate opportunity of being heard to the assessee. It is again reiterated that forex gain/loss shall for part of operating operations and suitable adjustments, as statutorily admissible, shall be made in TP study. The appeal is allowed for statistical purposes

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Assessment Years 2009-10 and 2010-11.
2. Inclusion of foreign exchange gains/losses in operating margins.
3. Functional dissimilarity of comparables.
4. Granting of working capital adjustment.

Detailed Analysis:

1. Transfer Pricing Adjustment for Assessment Years 2009-10 and 2010-11:
The assessee, engaged in providing IT enabled services (ITES), contested the transfer pricing (TP) adjustments made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP). For AY 2009-10, the TPO suggested a TP adjustment of ?5,11,86,725/-, which was incorporated into the draft assessment order and confirmed by the DRP. Similarly, for AY 2010-11, the TPO suggested a TP adjustment of ?3,55,96,523/-, which was also confirmed by the DRP.

2. Inclusion of Foreign Exchange Gains/Losses in Operating Margins:
The assessee argued that the TPO erred in treating foreign exchange (forex) gains/losses as non-operating in nature. The assessee cited various judicial pronouncements to support that forex gains/losses should be treated as part of operating income while computing operating margins. The tribunal admitted this contention, noting that the issue was a pure legal one and did not require investigation of additional facts. It was held that forex gains/losses are part of operating margins, aligning with the judicial precedents cited by the assessee.

3. Functional Dissimilarity of Comparables:
The assessee challenged the inclusion of 'Cosmic Global Ltd.' as a comparable on the grounds of functional dissimilarity, arguing that it had outsourced its activities. The tribunal, referencing the Mumbai Tribunal decision in Aegis Ltd. Vs. ACIT, agreed and excluded 'Cosmic Global Ltd.' from the list of comparables. For AY 2010-11, the assessee also contested the inclusion of 'Infosys BPO Ltd.' and 'Accentia Technologies Ltd.' due to significant differences in turnover and extraordinary events like amalgamation. The tribunal, following the decisions in CIT Vs. Pentair Water India Pvt. Ltd. and FIL India Business Services Pvt. Ltd. Vs. DCIT, excluded these comparables as well.

4. Granting of Working Capital Adjustment:
The assessee sought a working capital adjustment, which was not initially granted by the TPO. The tribunal, referencing the Mumbai Tribunal decision in Capgemini India Pvt. Ltd., directed that the working capital adjustment should be granted to the assessee.

Conclusion:
The tribunal allowed the appeals for statistical purposes, directing the Assessing Officer (AO)/TPO to undertake a fresh TP study with robust comparables and to include forex gains/losses as part of operating margins. The tribunal also directed the granting of working capital adjustments as per statutory provisions. The matter was remitted back to the AO/TPO for fresh consideration, ensuring adequate opportunity for the assessee to be heard.