2016 (5) TMI 631 - AT - Income Tax

Transfer pricing adjustment - Profit Level Indicator (PLI) - adjustment on account of foreign currency loss to the profit margins which are adopted for working out the PLI - Held that - While computing PLI for the year under consideration, the loss arising on account of foreign exchange fluctuation to the tune of ₹ 35,31,729/- is to be excluded. However, the loss arising on account of export proceeds realized from exports of relevant year are to be considered while computing PLI of the assessee. In view thereof, we modify the order of CIT(A) and direct the Assessing Officer to re-compute the PLI in the hands of assessee and foreign exchange fluctuation losses of the earlier years are to be kept out of calculation of PLI for the year under consideration. No adjustment is to be made on account of depreciation in the hands of assessee while computing PLI of the assessee.

Issues Involved:
1. General nature of the Revenue's appeal.
2. Treatment of foreign currency fluctuation in calculating the Profit Level Indicator (PLI).
3. Adjustment on account of depreciation.
4. Exclusion of Rolta India Ltd. from the set of comparables.
5. Functional comparability of KLG Systel Ltd. with the assessee company.

Detailed Analysis:

1. General Nature of the Revenue's Appeal:
The ground of appeal No.1 raised by the Revenue is general and hence, the same is dismissed as general.

2. Treatment of Foreign Currency Fluctuation in Calculating the PLI:
The Revenue contended that the CIT(A) erred in holding that foreign currency fluctuations are non-operational items to be excluded from the calculation of the PLI. The assessee argued that the foreign currency losses were due to the late receipt of export proceeds from earlier years, specifically from financial year 2005-06, which were received in 2008 due to bankruptcy proceedings of Dana Corporation in the USA. The CIT(A) accepted that foreign currency losses related to previous years should be excluded from the PLI calculation, while losses related to the current year should be included. The Tribunal upheld this view, directing the Assessing Officer to re-compute the PLI by excluding foreign exchange fluctuation losses of earlier years from the calculation.

3. Adjustment on Account of Depreciation:
The CIT(A) allowed adjustment on account of depreciation, noting that the assessee charged higher depreciation rates compared to the rates prescribed under the Companies Act, while comparable companies adopted lower rates. The Revenue challenged this, and the Tribunal agreed with the Revenue, reversing the CIT(A)'s decision and ruling that no adjustment should be made on account of depreciation when computing the PLI.

4. Exclusion of Rolta India Ltd. from the Set of Comparables:
The TPO included Rolta India Ltd. as a comparable, but the CIT(A) excluded it, noting that its turnover was significantly higher than that of the assessee. The CIT(A) found that Rolta India Ltd. was not functionally comparable due to its diverse activities and significant turnover difference. The Tribunal upheld the CIT(A)'s decision, noting that Rolta India Ltd.'s turnover was either ?599 crores or ?347 crores, which was much higher than the assessee's turnover of ?13.31 crores. The Tribunal also referenced the Hon'ble Bombay High Court's decision in CIT Vs. M/s. Pentair Water India Pvt. Ltd., emphasizing that large and distinct companies cannot be benchmarked with the tested party.

5. Functional Comparability of KLG Systel Ltd. with the Assessee Company:
The TPO included KLG Systel Ltd. as a comparable, but the CIT(A) excluded it, finding that it was not functionally comparable due to its substantial income from professional fees, service charges, and disclosed closing stock and work-in-progress. The Tribunal upheld the CIT(A)'s decision, noting that KLG Systel Ltd.'s turnover of ?112.53 crores was much higher than the assessee's turnover. The Tribunal also referenced the Hon'ble Delhi High Court's decision in CIT Vs. Agnity India Technologies (P.) Ltd., which held that turnover is a relevant factor in comparability.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, making specific rulings on each issue. The general nature of the Revenue's first ground was dismissed. The Tribunal upheld the CIT(A)'s decision to exclude foreign currency losses from previous years in the PLI calculation but reversed the decision on depreciation adjustments. The Tribunal also upheld the exclusion of Rolta India Ltd. and KLG Systel Ltd. from the set of comparables due to their functional dissimilarity and significantly higher turnovers.

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