2019 (7) TMI 1965 - AT - Income Tax

TP Adjustment - comparable selection - Accentia Technologies Ltd inclusion/inclusion - HELD THAT - Regarding the business model while the assessee company is in HMT model the comparable in question depends mostly on outsourcing of business processes. The audit report clearly mentions that no segmental data has been prepared and company has only one segment of activity which is HRCM segment. Hence keeping in view the factors viz. dissimilar business model non-comparable turnover extraordinary events of merger and acquisitions leading to higher profits and non-availability of the segmental data and considering the order of the Tribunal in the assessee s own case for the assessment year 2009-10 we hereby hold that the ld. CIT(A) has rightly excluded the company Accentia Technologies Ltd. from the final list of comparables. Consider foreign exchange gain/loss as non-operative while calculating the operating profit margin of the Assessee and the comparable companies - HELD THAT - The foreign exchange emanating from international transaction is a part of business receipt and hence any loss or gain on foreign exchange fluctuation invariably is a part of operational income. Further owing to the judgments of FISERV India Pvt. Ltd. 2016 (1) TMI 1276 - DELHI HIGH COURT and in the case of PCIT Vs BC Management Services Pvt. Ltd. 2017 (12) TMI 255 - DELHI HIGH COURT wherein it was held that even the Safe Harbor Rules come into force from 2013 and hence is not applicable to the instant year we hereby direct the Revenue to treat the foreign exchange gains or losses under operating revenues.

Summary

Issues:
1. Exclusion of a company from comparables in Transfer Pricing study.
2. Acceptance of additional evidence under Rule 46A of the Income Tax Rules, 1962.
3. Treatment of foreign exchange gain/loss as non-operative while calculating operating profit margin.

Issue 1: Exclusion of a company from comparables in Transfer Pricing study:
The appellant, a provider of medical transcription services, excluded Accentia Technologies Ltd. from the Transfer Pricing (TP) study due to lack of segmental data. However, the Taxation Officer (TPO) included this company in the study. The Commissioner of Income Tax (Appeals) directed the exclusion of Accentia Technologies Ltd. as a comparable, citing an extraordinary event of amalgamation affecting its profits. The Appellate Tribunal upheld this decision, considering factors like dissimilar business models, non-comparable turnover, and absence of segmental data. The Tribunal concluded that the exclusion was justified based on these grounds.

Issue 2: Acceptance of additional evidence under Rule 46A:
The Revenue challenged the acceptance of additional evidence under Rule 46A by the Commissioner of Income Tax (Appeals). However, during the proceedings, the Revenue failed to produce any evidence to support their objection. Consequently, the Tribunal dismissed this ground of appeal.

Issue 3: Treatment of foreign exchange gain/loss in operating profit margin:
The appellant objected to treating foreign exchange gain/loss as non-operating while calculating the operating profit margin. The Tribunal noted that foreign exchange gains/losses arising from international transactions are part of operational income. Referring to relevant judgments, including those of the High Court, the Tribunal directed the Revenue to consider foreign exchange gains/losses under operating revenues. The Tribunal held that the Safe Harbor Rules, cited by the Revenue, were not applicable to the relevant year, supporting the appellant's position.

In conclusion, the Tribunal dismissed the Revenue's appeal and allowed the Cross Objection of the assessee, emphasizing the correct treatment of foreign exchange gains/losses and the exclusion of Accentia Technologies Ltd. from the comparables in the Transfer Pricing study.