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2018 (10) TMI 1395 - AT - Income TaxTPA - determining the Arm s Length Price (ALP) u/s. 92CA(3) in respect of international transactions entered by the assessee with its AE - foreign exchange gain earned by the assessee is generated from the services rendered to AE - Held that - We find that the AO was not justified in not following the directions given by the ld. DRP. We, therefore, remit this matter back to the AO/TPO to consider the foreign exchange gain as operating income of the assessee while working out the operating profit margin of the assessee, as directed by the ld. DRP. We further direct that the AO/TPO should calculate operating profit margin as per Rule 10B(1)(e) of the Income Tax Rules, 1963, if the assessee satisfies the conditions as per rules. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, these grounds are allowed for statistical purposes. Rejection of comparable companies on the basis of additional filter of export sales less than 75% of the total income - Held that - No justification to discard the conclusion reached by the authorities below while considering this filter as appropriate filter for comparability analysis in the facts of the present case. The ld. AR of the assessee failed to rebut the finding of the ld. DRP that more than 86% of the operating revenue is earned by assessee out of export sales. Therefore, considering the quantum of export gross revenue of the assessee, the authorities below have rightly applied this filter as an appropriate filter for comparability analysis. Accordingly, this ground of assessee has no merit and is liable to fail. Companies functionally dissimilar with that of assessee as engaged in BPO/KPO services need to be deselected from final list. The company is not passing on the filter of related party transaction in excess of 25%, applied by the TPO to be rejected.- Any extraordinary events like amalgamation occurred during the year, the financial result is affected
Issues Involved:
1. Completion of assessment under section 144C read with section 143(3) of the Income-tax Act, 1961. 2. Adjustment to the arm’s length price of international transactions of BPO/Data Processing Services. 3. Computation of operating profit margin and reconciliation with audited financial statements. 4. Consideration of exchange fluctuation income as non-operating for computing operating profit margin. 5. Rejection of comparable companies based on additional filter of export sales less than 75% of total income. 6. Selection of certain companies as comparables. 7. Allowance of appropriate risk adjustment for the appellant. 8. Rejection of contention regarding risk adjustment. 9. Comparability adjustment on account of working capital employed. 10. Levying of interest under section 234B and section 234C of the Act. Detailed Analysis: Issue 1: Completion of Assessment The assessing officer (AO) completed the assessment under section 144C read with section 143(3) of the Income-tax Act, 1961, determining an income of ?4,72,94,133 against the returned income of ?2,61,11,546. Issue 2: Adjustment to Arm’s Length Price The AO made an adjustment of ?2,11,82,587 to the arm’s length price of the international transactions of BPO/Data Processing Services rendered to the associated enterprise based on the Transfer Pricing Officer (TPO)'s order under section 92CA(3) of the Act. Issue 3: Computation of Operating Profit Margin The AO/TPO computed the operating profit margin of the appellant at 6.99% instead of the correct operating profit margin of 7.98%, holding that: - The values reported in the Transfer Pricing Documentation did not reconcile with the audited financial statement for the financial year 2012-13. - Foreign exchange gain/loss was considered non-operating for computing the operating profit margin of the appellant and the comparable companies. Issue 4: Exchange Fluctuation Income The AO/TPO considered exchange fluctuation income of ?29,03,948 as a non-operating item of income for computing the operating profit margin of the appellant, disregarding the directions of the Dispute Resolution Panel (DRP). Issue 5: Rejection of Comparable Companies The AO/TPO rejected comparable companies on the basis of an additional filter of export sales less than 75% of the total income, without appreciating that selection of comparable companies on the basis of such quantitative filters alone defies the purpose of the benchmarking analysis. Issue 6: Selection of Certain Comparables The TPO included the following companies in the final set of comparable companies, which the appellant claimed were not functionally comparable: - Igate Solutions Ltd. - Capgemini Business Services (India) Pvt. Ltd. - e4e Healthcare Issue 7: Risk Adjustment The AO/TPO did not allow appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent ITES service providers. Issue 8: Rejection of Risk Adjustment The AO/TPO rejected the contention of the appellant regarding risk adjustment, allegedly holding that the appellant failed to provide any evidence to demonstrate that any risk was actually undertaken by the comparable companies and such risks affected their operating profit margin. Issue 9: Working Capital Adjustment The AO/TPO did not allow comparability adjustment on account of working capital employed by the appellant vis-a-vis comparable companies. Issue 10: Levying of Interest The AO levied interest under section 234B and section 234C of the Act. Judgment: Completion of Assessment: The AO completed the assessment under section 144C read with section 143(3) of the Income-tax Act, 1961, determining an income of ?4,72,94,133 against the returned income of ?2,61,11,546. Adjustment to Arm’s Length Price: The AO made an upward adjustment of ?2,29,23,420/- being the ALP of international transactions for ITeS provided to its AE. The TPO included companies which were rejected by the assessee in the transfer pricing documentation either on account of functional dissimilarity or insufficient financial information and arrived at a set of 13 comparable companies. Computation of Operating Profit Margin: The AO/TPO computed the operating profit margin of the appellant at 6.99% instead of the correct operating profit margin of 7.98%. The Tribunal remitted the matter back to the AO/TPO to consider the foreign exchange gain as operating income while working out the operating profit margin of the appellant, as directed by the DRP. Exchange Fluctuation Income: The Tribunal directed the AO/TPO to consider the foreign exchange gain as operating income of the assessee while working out the operating profit margin, as directed by the DRP. Rejection of Comparable Companies: The Tribunal upheld the rejection of comparable companies on the basis of additional filter of export sales less than 75% of the total income, considering the quantum of export gross revenue of the assessee. Selection of Certain Comparables: - Igate Solutions Ltd.: The Tribunal directed the AO/TPO to exclude this company from the final set of comparable companies due to related party transactions exceeding 25%, mergers/acquisitions during the year, and lack of segmental data. - Capgemini Business Services (India) Pvt. Ltd.: The Tribunal directed the AO/TPO to analyze the comparability test of this company on the basis of segmental information, if available. - e4e Healthcare: The Tribunal upheld the inclusion of this company as a comparable, as the assessee raised objections only on the basis of employee cost filter and not on functional dissimilarity or non-availability of segmental data. Risk Adjustment: The Tribunal upheld the rejection of risk adjustment by the AO/TPO, stating that the assessee failed to provide evidence demonstrating the actual risk undertaken by the comparable companies and how it affected their operating profit margin. Working Capital Adjustment: The Tribunal did not accept the ground of working capital adjustment as it was not raised before the DRP or dealt with by the lower authorities. Levying of Interest: The Tribunal directed the AO to give consequential effect to the charging of interest under section 234B and section 234C. Conclusion: The appeal of the assessee was partly allowed, with specific directions to the AO/TPO regarding the computation of operating profit margin and the exclusion/inclusion of certain comparable companies. The Tribunal upheld the rejection of risk adjustment and working capital adjustment.
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