2021 (6) TMI 1134 - AT - Income Tax

TP Adjustment - MAM selection - authorities below while adopting the TNMM Method by making an adjustment u/s. 92CA of the Act on the whole Operating Cost incurred by the eligible Assessee - HELD THAT - The contention of the assessee is primarily acceptable and the decision cited by the learned AR in respect of the assessee s contention is supportive of such conclusion. However the learned DRP has given a finding that the figures as given by the assessee needs to be verified. According to the DRP the assesseee has not maintained separate segmental details and the claim has been based only on internal reports without any certificate from the auditor. In such an event the DRP should have called upon the Assessee to furnish the required details. When in principle adjustment cannot be made in respect of transaction with unrelated parties u/s.92 of the Act the DRP should have called for the required details rather than not adjudicating even on the principle. We are therefore of the view that in principle we agree to the proposition put forward by the assessee in ground No.6. We however remand the issue to the AO/TPO to call upon the assessee to given the correct figures based on certificate from the auditor and thereafter make adjustment in respect of ALP only in respect of transactions with AE. Thus the ground of appeal is treated as allowed for statistical purposes. Computing the arm s length price of the international transactions - TPO treating the Exchange fluctuation gain as non-operating in nature and excluded the same from computation of Operating margins of the eligible Assessee while computing the arm s length price of the international transactions - HELD THAT - Foreign exchange has been treated as the part of the operating profits if they are integral to the process of the export of the software or if they arise out of operating income of the assessee. In view of the aforesaid decision SAP LABS INDIA (P.) LTD. 2010 (8) TMI 676 - ITAT BANGALORE ELECTRONICS FOR IMAGING INDIA PVT. LTD. 2016 (2) TMI 1123 - ITAT BANGALORE AND M/S. KHF COMPONENTS PVT. LTD. 2016 (7) TMI 811 - ITAT BANGALORE we are of the view that the foreign exchange gain has to be treated as part of the operating profit of the assessee. We hold and direct accordingly.

Summary

Issues Involved:
1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing.
2. Adjustment of Transfer Pricing based on transactions with Associated Enterprises (AEs) versus unrelated parties.
3. Treatment of foreign exchange fluctuation gains in computing operating margins.

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing:
The assessee, engaged in software development services, manpower supply, and training, filed a return for AY 2012-13 declaring an income of Rs. 10,21,07,240/-. The assessee used the Comparable Uncontrolled Price (CUP) method in its Transfer Pricing (TP) study to justify the transactions with its foreign AE as being at arm's length. However, the Transfer Pricing Officer (TPO) adopted the Transaction Net Margin Method (TNMM) as the MAM. The TPO determined the arm's length price (ALP) of the international transactions by comparing the profit margins of comparable companies, leading to an adjustment of Rs. 4,20,60,956/- to the assessee's income.

2. Adjustment of Transfer Pricing based on transactions with Associated Enterprises (AEs) versus unrelated parties:
The assessee contended that the TPO erred in making an adjustment under section 92CA of the Income Tax Act on the entire operating cost without bifurcating between related and unrelated party transactions. The assessee provided detailed segment-wise break-ups of operating margins for software development, manpower supply, and training services, showing higher margins with related parties compared to unrelated parties. The TPO did not take cognizance of these details. The Dispute Resolution Panel (DRP) upheld the TPO's approach, stating the assessee did not maintain separate segmental details in its annual reports and only provided internal reports without auditor certification.

The Tribunal agreed with the assessee's contention that adjustments should only be made in respect of transactions with AEs and not unrelated parties. The Tribunal cited its own decision in the assessee's case for AY 2009-10 and other cases supporting this view. The Tribunal remanded the issue to the AO/TPO to verify the figures provided by the assessee with auditor certification and make adjustments only for transactions with AEs.

3. Treatment of foreign exchange fluctuation gains in computing operating margins:
The assessee raised an additional ground that the TPO erred in treating exchange fluctuation gains of Rs. 1,34,61,664 as non-operating. The DRP rejected this additional ground, citing procedural delays and consistency in treatment from previous years. The Tribunal, however, held that the DRP should have considered the additional ground as it was raised within the permissible time frame. The Tribunal referenced several decisions where foreign exchange gains integral to the export process were treated as part of operating profits. Consequently, the Tribunal directed that the foreign exchange gain be treated as part of the operating profit of the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO/TPO to make adjustments only in respect of transactions with AEs based on verified figures and to treat foreign exchange gains as part of the operating profits.