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2016 (3) TMI 356 - AT - Income TaxTransfer pricing adjustment - whether the foreign exchange gain/income from service provided to AE will be part of the operating revenue/income? - Held that - In view of the coordinate bench of the Tribunal in the case of Rusabh Diamonds (2013 (11) TMI 520 - ITAT MUMBAI ), we hold that the foreign exchange gain/income from service provided to AE will be part of the operating revenue/income of the assessee and consequently it will be part of the operating profit of the assessee for the purpose of determining the ALP in respect of the international transaction. However, the related aspect on this issue is also to be kept in mind that while taking the margins of the comparables, the effect of foreign exchange in the margins of the comparables should also be taken into account. Therefore, we direct the AO/TPO to re-compute the margin of the assessee by including foreign exchange gain but exclude other incomes on account of interest etc and further to consider the operating margin of the comparable after giving effect to foreign exchange gain or loss in their respective margins to arrive at the mean margin. Accordingly, this issue of the assessee is partly allowed. Selection of comparable - Held that - Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE Eclerx Services Ltd. company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP. Infosys BPO Ltd. - revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. Cosmic Global Ltd. be excluded as the segmental revenue of BPO segment of Cosmic Global Limited is still on much lower side. Reducing travel expenses incurred in foreign currency from the export turnover while computing deduction u/s 10A - Held that - This issue is now covered by the judgment of the Hon ble jurisdictional High Court in the case of Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) wherein held . When the statute prescribes a formula and in the said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover
Issues Involved:
1. Transfer Pricing matters. 2. Corporate tax matters. Detailed Analysis: Transfer Pricing Matters: 1. Violation of Principles of Natural Justice: - The assessee argued that the order passed by the Additional Commissioner of Income Tax (Transfer Pricing) was prejudicial and violated principles of natural justice. - The Tribunal did not specifically address this issue, as it was general in nature. 2. Arm's Length Price Determination: - The Tribunal reviewed the Transfer Pricing Officer's (TPO) methods, including the use of non-contemporaneous data and rejection of comparable companies. - The TPO's fresh benchmarking analysis and selection of comparables were contested by the assessee, particularly the inclusion of companies not functionally similar. 3. Re-computation of Operating Profit: - The Tribunal addressed the exclusion of foreign exchange gains from the operating profit margin. - It was held that foreign exchange gains related to the service provided to the Associated Enterprise (AE) should be included in the operating profit margin. - The Tribunal directed the TPO to re-compute the margins by including foreign exchange gains and excluding other incomes like interest. 4. Functional Comparability of Selected Companies: - The Tribunal examined the functional comparability of four companies: Accentia Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., and Cosmic Global Ltd. - Accentia Technologies Ltd.: Rejected due to functional dissimilarity and involvement in healthcare activities. - Eclerx Services Ltd.: Rejected as it provided high-end KPO services, unlike the assessee's low-end BPO services. - Infosys BPO Ltd.: Rejected due to an extraordinary event of amalgamation and functional dissimilarity. - Cosmic Global Ltd.: Rejected as its major revenue came from translation services, which were outsourced. 5. Use of Contemporaneous Data: - The Tribunal upheld the TPO's approach of using current year data for comparability instead of multiple year/prior year data used by the assessee. 6. Adjustments under Rule 10B: - The Tribunal did not specifically address this issue as the assessee did not press it during the hearing. 7. Benefit of Proviso to Section 92C(2): - The Tribunal directed the TPO to consider the benefit of tolerance range +/-5% as per the proviso to Section 92C. Corporate Tax Matters: 1. Reduction of Travel Expenses from Export Turnover: - The Tribunal addressed the issue of reducing travel expenses incurred in foreign currency from the export turnover while computing the deduction under Section 10A. - The Tribunal followed the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd., which held that expenses excluded from the numerator (export turnover) should also be excluded from the denominator (total turnover) to maintain uniformity. - The Tribunal upheld the CIT(A)'s direction to reduce the travel expenses from both the export turnover and the total turnover. Conclusion: - The assessee's appeal was partly allowed, with directions to re-compute the ALP after excluding certain comparables and including foreign exchange gains in the operating profit. - The revenue's appeal was dismissed, upholding the CIT(A)'s directions regarding the computation of deduction under Section 10A.
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