2018 (7) TMI 1258 - HC - Income Tax

TPA - exclude the expenditure in foreign currency from the export turnover and the total turnover for provision in section 10A - searching for comparable companies of the assessee under TNMM - substantial question of law - Held that - This Court in Prl.Commissioner of Income Tax & Anr. Vs. M/s.Softbrands India Pvt. Ltd. (2018 (6) TMI 1327 - KARNATAKA HIGH COURT ) has held that in these type of findings of the learned Tribunal remained final fact findings of the learned Tribunal and are binding on the lower authorities of the Department as well as this Court and unless an established ex-facie perversity is found in the findings of the learned Tribunal, the appeal u/s.260A of the Act is not maintainable.

Issues Involved:
1. Inclusion of foreign exchange gain as part of operating revenues.
2. Equating business income/sales with operating revenues.
3. Risk assumption by the assessee company.
4. Rejection of certain companies as comparables.
5. Arm's length price (ALP) adjustment and the +/-5% margin.
6. Applicability of the amended proviso to section 92C(2).
7. Exclusion of telecommunication expenses from total turnover for section 10A deduction.

Detailed Analysis:

1. Inclusion of Foreign Exchange Gain as Part of Operating Revenues:
The tribunal concluded that foreign exchange fluctuation gains are an integral part of the sales proceeds for an assessee engaged in export business. This was supported by precedents from the Bombay High Court, Gujarat High Court, and Mumbai ITAT Special Bench, which held that such gains form part of the operating income and contribute to the operating margin. Hence, the contention of the assessee was accepted, and foreign exchange fluctuations were included in the computation of the operating margin.

2. Equating Business Income/Sales with Operating Revenues:
The tribunal found that the assessee company, primarily engaged in R&D and software technology services for its holding company, operated in a risk-mitigated environment. Therefore, it was inappropriate to compare it with companies having significant open market operations. The tribunal held that extreme cases of super profit-making companies, such as Hinduja TMT Ltd. and Aftek Infosys Ltd., should not be considered as comparables due to their significantly higher profit margins.

3. Risk Assumption by the Assessee Company:
The tribunal noted that the assessee company operated under a risk-mitigated environment, with remuneration stipulated at cost plus 6% or the total wages bill, whichever is higher. Therefore, it was not comparable to independent competitors in the market. The tribunal emphasized that the assessee's limited role in generating commercial profit justified excluding super profit-making companies from the list of comparables.

4. Rejection of Certain Companies as Comparables:
The tribunal excluded Hinduja TMT Ltd. and Aftek Infosys Ltd. from the list of comparables due to their extreme profit margins. The TPO/AO had failed to explain the functional similarity among the selected comparables, leading the tribunal to determine that such super profit-making companies were not suitable for comparison.

5. Arm's Length Price (ALP) Adjustment and the +/-5% Margin:
The tribunal discussed the old and new provisos to section 92C(2). Under the old proviso, the assessee could claim a marginal relief of 5% as a standard deduction, irrespective of the actual deviation between the disclosed margin and the average mean margin. The new proviso, effective from 01-10-2009, clarified that the marginal relief of 5% would not act as a standard deduction. The tribunal upheld that the benefit of the 5% deduction should be given to the assessee if warranted by the circumstances.

6. Applicability of the Amended Proviso to Section 92C(2):
The tribunal held that the amended proviso to section 92C(2), effective from 01-10-2009, did not apply to the AY 2003-04. The assessee was entitled to the marginal relief as per the old proviso, which allowed a 5% standard deduction.

7. Exclusion of Telecommunication Expenses from Total Turnover for Section 10A Deduction:
The tribunal's decision to exclude telecommunication expenses from the total turnover was supported by the Division Bench decision in M/s. Tata Elxsi Ltd. and affirmed by the Supreme Court in the case of HCL Technologies Ltd. The courts held that expenses excluded from export turnover must also be excluded from total turnover to avoid illogical results and ensure the legislative intent is fulfilled.

Conclusion:
The Karnataka High Court dismissed the Revenue's appeal, finding no substantial question of law. The court emphasized that unless an ex-facie perversity in the tribunal's findings is established, appeals under Section 260-A of the Act are not maintainable. The appeals filed by the Revenue were deemed devoid of merit and dismissed with no costs.

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