2015 (4) TMI 1359 - AT - Income Tax

TP Adjustment - Foreign Exchange Gain as a part of Operating Revenue - contention of the assessee that the TPO erred in not treating the foreign exchange fluctuation as part of the operating profits and adding the same to the income from IT enabled services - HELD THAT - Foreign exchange fluctuation has arisen as a result of the realization of the consideration for rendering software development services. It therefore arises or occurs in the normal course of business and hence there is no reason why it should be excluded from determining the operating revenue while computing the margin - we hold that the operating revenue of the assessee be computed by including the foreign exchange gain. Donation to be excluded from operating revenue while computing the margin of the assessee - As already expressed the view that those expenses incurred / incomes earned in the normal course of business are to be included for determining the operating revenue while computing the margins. By the same analogy those expenses which are not part of normal business activities should get excluded for determining the operating revenue while computing the margin. As donation is not in the nature of the normal business activity of the assessee we hold and direct that donation requires to be excluded from operating revenue while computing the margin. Comparable selection - Accentia Technologies Ltd. be excluded from the list of comparables in view of the occurrence of extra-ordinary event of the amalgamation which would impact financial results in the period under consideration thereby rendering it not comparable to the assessee in the case on hand. eClerx Services Ltd. is to be excluded from the final list of comparables since it is engaged in providing high end services involving specialized knowledge and domain expertise rendering it functionally different from an IT enabled service company as in the assessee in the case on hand. Cosmic Global Ltd. was excluded because the only comparable segment i.e. Accounts BPO segment has low volume of sales as compared to the entity level. Whether this finding of fact is also applicable to the assessee case requires fresh examination as it has not been examined by the TPO and neither has this issue been agitated by the assessee either before the authorities below or before us in the present appeal. In this view of the matter we deem it appropriate to remand this issue to the file of the TPO to consider the comparability of this company afresh in the light of the judicial pronouncements cited and the principles and observations laid out therein.

Summary

Issues Involved:
1. Re-computation of the arm's length price and related transfer pricing adjustments.
2. Exclusion of certain comparable companies from the final set of comparables.
3. Inclusion of foreign exchange gain in operating revenue.
4. Exclusion of donations from operating revenue.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Re-computation of the Arm's Length Price and Related Transfer Pricing Adjustments:

The assessee adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) using Net cost plus mark up and the Profit Level Indicator (PLI). The assessee chose 8 companies as comparables with an average profit margin of 4.34%. The TPO rejected this comparability analysis, conducted his own search, and selected 8 different comparables with an average margin of 25.04%. After adjustments, the TPO computed the Arm's Length Price (ALP) adjustment at Rs. 1,04,14,489, which was later revised to Rs. 1,77,38,145 by the DRP.

2. Exclusion of Certain Comparable Companies from the Final Set of Comparables:

Accentia Technologies Ltd.:
The Tribunal excluded Accentia Technologies Ltd. from the list of comparables due to the occurrence of extraordinary events such as amalgamation, which impacted the financial results, making it non-comparable to the assessee.

eClerx Services Ltd.:
eClerx Services Ltd. was also excluded from the list of comparables as it was engaged in providing high-end services involving specialized knowledge and domain expertise, rendering it functionally different from the assessee.

Cosmic Global Ltd.:
The Tribunal remanded the issue of including Cosmic Global Ltd. back to the TPO for fresh examination. The decision was based on the fact that the comparable segment, i.e., Accounts BPO segment, had a low volume of sales compared to the entity level, and this finding required verification.

3. Inclusion of Foreign Exchange Gain in Operating Revenue:

The Tribunal held that foreign exchange gain should be included in the operating revenue while computing the margin. This decision was based on the fact that foreign exchange fluctuation arose from the realization of consideration for rendering services, thus occurring in the normal course of business.

4. Exclusion of Donations from Operating Revenue:

The Tribunal directed that donations should be excluded from operating revenue while computing the margin, as donations are not part of normal business activities.

5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:

The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c) as infructuous, since no penalty was imposed in the impugned order.

Conclusion:

The appeal was partly allowed, with specific directions to exclude certain companies from the list of comparables and to include foreign exchange gain in the operating revenue while excluding donations. The issue of including Cosmic Global Ltd. was remanded for fresh examination. The ground related to penalty proceedings was dismissed as infructuous.