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2019 (11) TMI 1777 - AT - Income TaxTP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Companies functionally dissimilar with that of assessee s international transactions qua provision of business support services need to be deselected. Aptico being into diversified business activities with no segmental information available and being into providing high end consultancy services is not a suitable comparable vis- -vis the taxpayer who is a routine business support service provider hence ordered to be excluded for benchmarking the international transactions GPCL is into diversified nature of activities; that it is established by Government to serve the professional procurement and management services need; that it has different business model with no financial segmental are available is not a suitable comparable vis- -vis the taxpayer who is into routine business support service provider hence ordered to be excluded. TSRDL is having different business profile vis- -vis the taxpayer who is a routine business support service provider; that TPO has taken entity level revenue from financials which are of diverse segments and services; that it has established state of the art infrastructure over the last 12 months and it has selected new Global Payroll ERP application called RAMCO for its fast growing payroll business is not a suitable comparable vis- -vis the taxpayer who is a routine business support service provider hence ordered to be excluded. Aptico being into diversified business activities with no segmental information available and being into providing high end consultancy services is not a suitable comparable vis- -vis the taxpayer who is a routine business support service provider hence ordered to be excluded for benchmarking the international transactions. Foreign exchange gain or loss on account of international transactions entered with its AE - TPO had not considered foreign exchange gain or loss as the case may be by treating the same non-operative income of the taxpayer by treating the PLI of the taxpayer as well as the comparables - HELD THAT - By now it is settled principle of law that foreign exchange gain or loss on account of international transactions entered with its AE in the ordinary course of business i.e. in provision of business support services the same cannot be treated as non-operating in nature. Hon ble Delhi High Court in case B.C. Management Services (P) Ltd. 2017 (12) TMI 255 - DELHI HIGH COURT held that foreign exchange gain/loss is part of the operating income for ALP determination. In Pr. CIT vs. Ameriprise (P) Ltd. 2016 (3) TMI 1272 - DELHI HIGH COURT held that foreign exchange gain earned by the taxpayer which is in relation to trading items and emanating from international transactions direct value derived from it cannot be treated as nonoperating losses and gains. We are of the considered view that TPO/DRP have erred in not considering the foreign exchange gain or loss as operating income/expenses. So the TPO is directed to treat foreign exchange gain/loss as operating income/expenses while computing PLI of the taxpayer as well as of the comparables. So Ground No.5 is determined in favour of the taxpayer. Benefit of risk adjustment - Benefit not granted by the TPO on the ground that the taxpayer is providing business support services to its AE on cost plus 10% mark-up for which it does not bear any risk on account of service delivery price utilization credit etc. - HELD THAT - We are of the considered view that since the taxpayer rendered services to its AEs on cost plus mark for which it is reimbursed and no price risk or utilization is borne by it the taxpayer is entitled for benefit of risk adjustment vis- -vis comparables chosen by the TPO. So Ground No.6 is determined in favour of the taxpayer.
Issues Involved:
1. Erroneous assessment of income. 2. Transfer pricing adjustments and arm's length price. 3. Rejection of comparable companies. 4. Incorrect selection of comparable companies. 5. Treatment of foreign exchange gain/loss. 6. Denial of economic/risk adjustments. 7. Non-application of the +/- 5% range. 8. Ignoring provisions of rule 108(4) and judicial pronouncements. 9. Levying of interest under sections 234B and 234D. Detailed Analysis: Ground No. 1: Erroneous Assessment of Income The taxpayer contested the assessment of income at INR 2,28,58,370 against the returned income of INR 98,77,683. This issue is general and does not require specific adjudication. Grounds No. 2, 3 & 4: Transfer Pricing Adjustments and Comparable Companies The taxpayer argued that the TPO/DRP erred in making transfer pricing adjustments by selecting inappropriate comparables. The Tribunal examined the suitability of three contested comparables: 1. Apitco Limited (APTICO): - The taxpayer sought exclusion of APTICO due to its diverse business activities and lack of segmental information. - The Tribunal found APTICO unsuitable as a comparable, citing its involvement in high-end technical services and diversified business activities, referencing previous decisions confirming its exclusion. 2. Global Procurement Consultants Limited (GPCL): - The taxpayer argued that GPCL’s business profile and segmental financials were not comparable. - The Tribunal agreed, noting GPCL's diverse activities and its establishment by the government, making it unsuitable as a comparable. 3. TSR Darashaw Ltd. (TSRDL): - The taxpayer contended that TSRDL’s diverse business profile and lack of segmental information made it an inappropriate comparable. - The Tribunal excluded TSRDL, highlighting its involvement in payroll process outsourcing and other specialized services, making it non-comparable to the taxpayer’s routine business support services. Ground No. 5: Treatment of Foreign Exchange Gain/Loss The taxpayer argued that the DRP/TPO erred in not considering foreign exchange gain or loss as operating income/expenses. The Tribunal upheld this contention, referencing judicial precedents that treat such gains/losses as part of operating income for ALP determination. Ground No. 6: Denial of Economic/Risk Adjustments The taxpayer sought risk adjustment, arguing it provided services on a cost-plus basis without bearing significant risks. The Tribunal agreed, citing that the taxpayer is entitled to risk adjustment due to its cost-plus mark-up arrangement and lack of price or utilization risk. Grounds No. 7, 8 & 9: Consequential and Procedural Issues These grounds were deemed consequential and did not require specific findings. Ground No. 8 was dismissed as it was not pressed during arguments. Conclusion: The Tribunal partly allowed the taxpayer's appeal, ordering the exclusion of APTICO, GPCL, and TSRDL from the set of comparables, directing the TPO to treat foreign exchange gain/loss as operating income/expenses, and granting risk adjustment to the taxpayer.
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