2018 (7) TMI 2150 - AT - Income Tax

TP Adjustment - comparable selection - Comparability analysis - Treatment to foreign exchange gain - HELD THAT - Foreign exchange fluctuation gain earned by assessee is operating income and therefore Ld.TPO/AO is directed to adjust the margin of the assessee by treating foreign exchange gain as operating income of assessee for determining PLI for comparability analysis. Assessee is engaged in providing software development services to its group AE - In TP study report assessee has been categorised as a full-fledged enterprise no real service provider engaged in the business of software development services.thus companies functionally dissimilar with that of assessee need to be deselected. Deduction u/s 10A - Whether income pertaining to un billed revenue is derived from export of software services and the same is eligible for deduction under section 10 A (3)? - HELD THAT - The agreements entered into by assessee with the parties with whom export have been effectuated, were placed before Ld.AO for his perusal and AO has not disputed the export of goods. In the light of the above and considering the fact that assessee generally has some amount of unbilled revenue for every Assessment Year which is subsequently received, we allow this ground raised by assessee.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Determination of income.
3. Transfer Pricing adjustments.
4. Deduction under Section 10A of the Income Tax Act.
5. Levy of interest under Section 234B and 234C.
6. Inclusion/exclusion of certain comparables by the TPO/DRP.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order framed by the AO under Section 143(3) read with Section 144C of the Income Tax Act was bad in law, violative of principles of natural justice, and void ab initio. However, this ground was considered general in nature and did not require adjudication.

2. Determination of Income:
The AO determined the income of the assessee at ?6,91,16,570 against the returned income of ?2,86,27,959. The assessee's appeal on this ground was also considered general and did not require specific adjudication.

3. Transfer Pricing Adjustments:
The AO made an addition of ?3,87,23,769 to the income of the assessee on account of the alleged difference in the arm's length price of international transactions. The issues arising out of the transfer pricing adjustment were as follows:

A) Consideration of Foreign Exchange Gain or Loss as Operating Income:
The assessee argued that foreign exchange fluctuation gains should be treated as operating income. The Tribunal, following the decision of the Hon’ble Delhi High Court in Principal CIT Vs. Fiserve India Pvt. Ltd., held that foreign exchange fluctuation gains should be treated as operating income and directed the AO/TPO to adjust the margin of the assessee accordingly.

B) Exclusion/Inclusion of Certain Comparables:
The Tribunal analyzed the comparability of various companies included/excluded by the TPO/DRP:

- Persistent Systems Ltd: Excluded as it was engaged in both software services and products without segmental information.
- Sasken Communication Technologies Ltd: Excluded due to involvement in sale of software products and owning IPR.
- Zylog Systems Ltd: Excluded as it owned brands and significant intangibles.
- Persistent Systems and Solutions Ltd: Included as it had sufficient segmental information.
- Wipro Technology Services Ltd: Excluded due to significant related party transactions and functional dissimilarity.

C) Incorrect Profit Margin Consideration:
The Tribunal noted that the TPO considered incorrect profit margins for certain companies despite DRP directions and directed the AO/TPO to recompute the margins correctly.

4. Deduction under Section 10A:
The AO disallowed the deduction under Section 10A to the extent of ?17,64,838 with respect to unbilled revenue. The Tribunal observed that the unbilled revenue was realized within the permissible period and allowed the deduction. The Tribunal also allowed the deduction for unbilled revenue of AY 2010-11 billed in AY 2011-12, following the RBI guidelines.

5. Levy of Interest under Section 234B and 234C:
The Tribunal held that the levy of interest under Section 234B and 234C is consequential in nature and did not require specific adjudication.

6. Inclusion/Exclusion of Comparables by TPO/DRP:
The revenue challenged the exclusion of E-Info Chips Ltd and Infosys Technologies Ltd and the inclusion of Calibre Point Business Solutions. The Tribunal upheld the exclusion of E-Info Chips Ltd and Infosys Technologies Ltd due to lack of segmental information and functional dissimilarity, respectively. The inclusion of Calibre Point Business Solutions was accepted as the TPO had already given effect to the DRP’s direction.

Conclusion:
The Tribunal partly allowed the assessee’s appeal and dismissed the revenue’s appeal, directing the AO/TPO to recompute the ALP of international transactions and the deduction under Section 10A in conformity with the Tribunal’s findings.