2017 (5) TMI 830 - AT - Income Tax

Transfer pricing adjustment in respect of Provision for Research and Information Services - comparability - Held that - The assessee is carrying on research from the internet based databases or other sources to compile the data, which is then customized/processed in accordance with the requirements of the requestor through a series of operations carried out by its Research Managers, Knowledge Experts, Practice Specialists and Senior Research Analyst etc. before finally transmitting it outside India after organizing into templates in Excel, Power Point etc. Thus, it is evident that the assessee is making value addition to the information accessed by it from databases etc. When we apply the requisites of KPO to the services rendered by the assessee under this segment, there remains hardly any doubt that the assessee is rendering KPO services under this segment involving huge expertise and skills. Thus companies functinally dissimilar with that of assessee need to be deselected from final list of comparable. Transfer pricing adjustment on account of interest on receivables - Held that - It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. A transfer pricing adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. Following the orders in Ameriprise (2015 (8) TMI 652 - ITAT DELHI ) and Techbooks(2015 (7) TMI 473 - ITAT DELHI) we uphold the view taken by the TPO on this issue. Interest on late realization of invoices is directed to charged in line with the directions given in the above orders of the Delhi Bench of the tribunal. Treatment of foreign exchange (forex) gain/loss as an item of operating nature in the computation of the ALP - Held that - We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has not been controverted by the ld. DR that the same is in relation to the trading items emanating from the international transactions. If the foreign exchange gain/loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. We are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. The ground taken by the Department is, therefore, dismissed.

Issues Involved:
1. Transfer pricing adjustment in respect of 'Provision for Research and Information Services.'
2. Transfer pricing adjustment in respect of 'Provision of Information Technology Support Services.'
3. Transfer pricing adjustment on account of interest on receivables.
4. Treatment of foreign exchange gain/loss as an item of operating nature in the computation of the ALP.

Detailed Analysis:

A. Research and Information Services

The assessee, a management consulting firm, provided research and information services to its group companies. The TPO applied the Transactional Net Margin Method (TNMM) to determine the arm's length price (ALP) and proposed a transfer pricing adjustment. The assessee challenged the inclusion of certain comparables introduced by the TPO. The Tribunal examined the nature of the services provided by the assessee, which included Knowledge on Call, Practice Research, and Analytics Group services. It was determined that the assessee was rendering Knowledge Process Outsourcing (KPO) services, requiring high expertise and skills. The Tribunal excluded the comparables Aditya Birla Capital Advisors Pvt. Ltd., Birla Sun Life Asset Management Company Ltd., ICRA Ltd., and Ladderup Corporate Advisory Pvt. Ltd., as they were functionally dissimilar to the services provided by the assessee.

B. Information Technology Support Services

The assessee reported another international transaction of 'Provision of Information Technology Support Services.' The TPO made certain inclusions and exclusions in the list of comparables and proposed a transfer pricing adjustment. The assessee disputed the inclusion of E-Clerx Services Ltd. and the non-inclusion of Informed Technologies India Ltd. and Micro Genetics Ltd. The Tribunal found an apparent conflict in the nature of services provided by the assessee under this segment and remitted the matter back to the AO/TPO to determine the correct nature of services and then decide the comparability of the companies challenged by the assessee.

C. Interest on Receivables

The TPO noticed delayed payments against invoices raised by the assessee and treated the delayed payments as unsecured loans to the AEs, warranting benchmarking. The Tribunal upheld the view that interest on receivables is an international transaction, requiring the determination of their ALP. The Tribunal directed that interest on late realization of invoices be charged in line with the directions given in previous orders of the Delhi Bench of the Tribunal.

D. Forex Loss

The Revenue contested the treatment of foreign exchange (forex) gain/loss as an item of operating nature in the computation of the ALP. The Tribunal found merit in the contention that forex gain/loss related to trading transactions of the assessee and should be considered as operating in the computation of OP/OC under the TNMM. The Tribunal referred to various judicial precedents supporting the inclusion of forex gain/loss in operating revenue/costs and dismissed the ground taken by the Department.

Conclusion:

The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for fresh determination of the ALP of both international transactions in conformity with the foregoing discussion. The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was dismissed.

← Previous Next →