2016 (5) TMI 252 - AT - Income Tax

Foreign exchange gain treated as non-operating income - Held that - Foreign exchange gain pertaining to marketing commission segment should be considered as operating income. Selection of comparable - Held that - In the present case, the authorities below having held that M/s Spinco s operations are functionally different than the assessee, in our considered view, M/s Spinco cannot be taken as a comparable. When M/s Spinco ceases to be a comparable, the TPO should look for external comparables which he has rightly adopted some of the external comparables. Therefore, following the decision of the Ahmedabad Bench of the Tribunal in the case of Fortune Infotech Ltd.(2016 (2) TMI 382 - ITAT AHMEDABAD ), we restore the matter to the file of the TPO who shall consider the external comparables and determine the ALP by taking the segmental financials after providing adequate opportunity of being heard to the assessee.

Issues Involved:
1. Admission of additional grounds of appeal.
2. Consideration of foreign exchange gain as operating income.
3. Rejection of Comparable Uncontrolled Price (CUP) method for benchmarking marketing support services.
4. Determination of Arm's Length Price (ALP) using net margins.
5. Application of Transactional Net Margin Method (TNMM) using external comparables.
6. Effective rate of commission.

Detailed Analysis:

1. Admission of Additional Grounds of Appeal:
The assessee filed additional grounds contending that the foreign exchange gain related to the marketing commission segment should be considered as operating income. The Tribunal admitted these additional grounds, citing that they are legal grounds and do not require investigation of additional facts, following the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd, 229 ITR 383.

2. Consideration of Foreign Exchange Gain as Operating Income:
The assessee argued that the foreign exchange gain derived from marketing commission transactions is directly linked to the marketing commission segment and should be considered as operating income. The Tribunal agreed, referencing decisions from the Bangalore and Hyderabad Benches of the Tribunal, which held that foreign exchange fluctuation gains are an integral part of the sales proceeds for an exporter-assessee and should be included in the operating margin. Consequently, the Tribunal directed the Assessing Officer to treat the foreign exchange fluctuation gain/loss as part of the operating margin.

3. Rejection of Comparable Uncontrolled Price (CUP) Method for Benchmarking Marketing Support Services:
The assessee initially adopted the CUP method for benchmarking marketing services related to international transactions, comparing its commission rate with that of M/s Spinco Biotech Pvt. Ltd. The Transfer Pricing Officer (TPO) rejected this method, citing functional differences between the assessee and M/s Spinco, including differences in the roles, functions, and risk profiles. The Tribunal upheld the TPO's rejection of the CUP method, noting that M/s Spinco was not functionally comparable.

4. Determination of Arm's Length Price (ALP) Using Net Margins:
The TPO adopted the TNMM method, selecting seven comparables to determine the ALP. The Dispute Resolution Panel (DRP) enhanced the assessment by considering M/s Spinco as a single comparable under the TNMM method, which the assessee contested. The Tribunal held that transfer pricing adjustments should not be based on a single comparable, especially when the comparable is functionally dissimilar. The Tribunal directed the TPO to use multiple external comparables for determining the ALP.

5. Application of Transactional Net Margin Method (TNMM) Using External Comparables:
The Tribunal emphasized the importance of using a reasonable number of comparables under the TNMM to ensure that the results are representative of the segment. The Tribunal referenced the decision in the case of Fortune Infotech Ltd, which highlighted that a single comparable is insufficient for TNMM, and reliable data from multiple comparables is necessary. The Tribunal restored the matter to the TPO to consider external comparables and determine the ALP using segmental financials.

6. Effective Rate of Commission:
The assessee raised grounds regarding the effective rate of commission earned during the year, which was higher than the rate considered appropriate by the ITAT in earlier years. However, these grounds were not pressed by the assessee during the proceedings.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the TPO to re-evaluate the ALP using multiple external comparables and segmental financials. The stay petition was dismissed as infructuous.

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