2018 (9) TMI 2133 - AT - Income Tax

TP Adjustment - recomputing the Appellant s net margin by treating liabilities no longer required written back and foreign exchange gain as non-operating items - treating foreign exchange gain as operating revenue - HELD THAT - As in the light of Rule 10B(3) of the Rules and the business cycle in the relevant business the comparability will not be materially affected if the foreign exchange gain is considered as reflected in the accounts of the comparable companies as available in public domain. Hon ble Delhi High Court in the case of Ameriprise India (P.) Ltd. 2016 (3) TMI 1272 - DELHI HIGH COURT supports the plea of the Assessee. We are therefore of the view that there is merit in contention raised by the Assessee and we hold that the TPO/DRP were not justified in reversing the Assessee s action in reducing an amount being foreign exchange gain from its operating expenses i.e. by treating it as a non-operating item. Therefore respectfully following the decision of the ITAT Bangalore in the case of SAP Labs 2010 (8) TMI 676 - ITAT BANGALORE we hold that the foreign exchange gain or loss should be treated as operating in nature and that such gain or loss as reflected in the books of accounts of the Assessee for the relevant previous year should be adopted as the basis. We therefore hold that the foreign exchange gain ought to either be included in the assessee s operating income or reduced from its operating costs as it has done in its TP study. Whether write back of the liabilities no longer required and also to be regarded as operating in nature ? - The decisions referred to by Assessee supports the plea of the Assessee write back of the liabilities no longer required are also to be regarded as operating in nature. In this regard it has not been disputed by the TPO/DRP that the liabilities written back as no longer required were all relating to operating expenses which had been treated as an operating item in the years they were expected to have been incurred. Therefore the write back of such liabilities ought to also be considered as an operating item in computation of the operating margin of the Assessee. We hold and direct accordingly. Comparable selection - action of the TPO in not including CG Vak Software Exports Limited ( CO Vak for short) as comparable to the assessee - It is an admitted position that for inclusion of companies as comparable company the employees cost incurred by a company should not be less than 25% of the revenue and this filter is regularly applied and accepted in Transfer Pricing Analysis in SWD services companies. As seen that both before the TPO and the DRP employee cost incurred by CG Vak is not separately disclosed in its financial statements and that instead CG Vak includes the said sum under the heads Cost of Services - Domestic and Cost of Services - International with the result that the total cost incurred by the company on its employees is not available in the public domain. It is the plea of the learned counsel for the Assessee before us that in the absence of such information it is not possible to accurately determine the percentage of the company s employee cost to its total revenue and thus it was submitted that there is no basis on which the said company could have been said to have failed the filter applied by the TPO. As submitted that if CG Vak s entire employee costs for FY 2008-09 are properly considered it would then pass the employee cost filter applied by the TPO. Thus it is submitted that CG Vak is comparable to the Appellant in all respects and but for its rejection on the above ground it passed all the filters applied by the TPO. Assessee seeking comparability of CG-Vak to be remanded to the TPO for computation of the correct employee cost. We are of the view that the request made by the Assessee in this regard deserves to be accepted. Accordingly the TPO/AO is directed to consider the employee cost vis-a-vis turnover of the Assessee by taking the correct sum of employee cost. Also companies functionally dissimilar need to be deselected form list of comparability .

Summary

Issues Involved:
1. Computation of Operating Profit to Total Cost (OP/TC) and treatment of foreign exchange gain and liabilities written back.
2. Inclusion and exclusion of specific comparable companies in Transfer Pricing analysis.
3. Application of the filter for Related Party Transactions (RPT).

Detailed Analysis:

1. Computation of OP/TC and Treatment of Foreign Exchange Gain and Liabilities Written Back:
The primary issue was the computation of the Assessee's net margin by the Transfer Pricing Officer (TPO). The TPO recomputed the margin by excluding liabilities no longer required written back from operating income and treating foreign exchange gain as non-operating. The Tribunal held that foreign exchange gain should be treated as operating in nature if it relates to the turnover of the relevant assessment year, following precedents like SAP Labs India (P.) Ltd. and Trilogy E Business Software India (P.) Ltd. The Tribunal also ruled that liabilities written back, which were originally operating expenses, should be considered as operating items based on decisions like Sony India (P.) Ltd. and Logica (P.) Ltd.

2. Inclusion and Exclusion of Comparable Companies:
The Assessee contested the inclusion and exclusion of several comparable companies. The Tribunal directed the inclusion of CG-VAK Software and Exports Ltd. if its employee costs met the required filter, following the precedent in Autodesk India (P.) Ltd. The Tribunal also directed the exclusion of Bodhtree Consulting Ltd., KALS Information Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., L&T Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. due to functional dissimilarities and differences in business operations, relying on previous rulings in similar cases like Infinera India (P.) Ltd. and Novell Software Development (India) (P.) Ltd.

3. Application of the Filter for Related Party Transactions (RPT):
The Assessee argued that the TPO's application of the RPT filter (>25% of sales) was against the reasonable limit of 15% as held by the Tribunal in the case of 24/7 Customer Com Private Limited. The Tribunal agreed that this filter should be applied consistently and directed the TPO to adhere to the 15% threshold.

Conclusion:
The Tribunal partly allowed the appeals, directing the TPO to recompute the Arm's Length Price (ALP) considering the Tribunal's guidance on the treatment of foreign exchange gain, liabilities written back, and the inclusion/exclusion of specific comparable companies. The Tribunal emphasized the importance of functional comparability and consistent application of filters in Transfer Pricing analysis.