2019 (2) TMI 104 - AT - Income Tax

TPA - ALP determination - assessee was charging cost plus 18% markup to its associated enterprises under the said software distribution segment - as per assessee where the assessee was remunerated at cost plus basis for providing the services to its associated enterprises, then there is no merit in making any adjustment in the hands of assessee - re-allocation of cost - Held that - In assessment years 2011-12 and 2012-13, re-allocation of cost has been carried out and the analysis filed by the assessee has been accepted as such. This was the position in assessment year 2013-14 despite the fact that in earlier years i.e. assessment years 2011-12 and 2012-13, margins of assessee were re-allocated and upward adjustment on account of international transactions was proposed in the hands of assessee. So, following the principle of consistency, cost allocation method which has been regularly followed by the assessee in allocating the cost to the software distribution segment need not be disturbed and the margins declared by assessee in its transactions with its associated enterprises should be accepted as the said margins are higher than the margins of selected comparables. Where the TPO himself has considered the cost incurred on sales & marketing, delivery services and client care cost centres to be attributable to distribution segment and where the assessee had re-charged cost with 18% markup to its associated enterprises, then cost plus revenue related to the aforesaid cost should also be attributed to the distribution segment. It is not disputed that the TPO had accepted the assessee s segmental bifurcation to arrive at TP adjustments. The cost allocated to software distribution segment had neither been challenged nor been disturbed by TPO, wherein the operating cost used by the TPO for margin computation of software distribution segment matches the total expenses in Row AA, column 2, matches operating cost used by TPO for margin computation of software distribution segment. Accordingly, no adjustment is warranted in the hands of assessee under the head software distribution segment . The arm s length price of software development segment is thus accepted to be at arm s length price. Consequently, the addition made by the Assessing Officer / TPO / DRP is deleted in the hands of assessee. DRP including the concern which was persistent loss making - comparable selection - Held that - The findings of DRP had held that the finding of Tribunal is that the concern could not be rejected merely on account of having loss situation in the current year. Hence, the DRP directed the Assessing Officer / TPO to include the company Nouveau Global Ventures in the set of final comparable companies. This is the only direction given by DRP in respect of any of the comparables. The concern was excluded as it had losses in the said year but it was not persistent loss making concern and hence, we find no error in the directions of DRP to include the said concern in final set of comparables. The ground of appeal No.1 raised by Revenue is thus, dismissed. Treatment of Forex exchange fluctuations - Held that - As decided in APPROVA SYSTEMS PVT. LTD. VERSUS CIT(A) -IT/TP AND DCIT, CIRCLE-1(1), PUNE 2015 (3) TMI 151 - ITAT PUNE Forex exchange fluctuation should be treated as operating income for transfer pricing purposes. Accordingly, we hold that Forex exchange fluctuation is to be held as operating in nature and to be included in the margins of software development segment for computing PLI of assessee. Selection of comparable - Held that - Companies to be rejected as being functionally not comparable to that of assessee who is in software development services.

Summary

Issues Involved:
1. Addition to total income based on Transfer Pricing provisions.
2. Attribution of service revenue to Software Distribution vs. Software Development segment.
3. Allocation of costs relevant to revenue segments.
4. Use of single-year vs. multiple-year data for comparables.
5. Inclusion of loss-making companies in comparables.
6. Treatment of Forex exchange fluctuations.
7. Selection of functionally comparable companies.

Detailed Analysis:

1. Addition to Total Income Based on Transfer Pricing Provisions:
The Assessing Officer (AO), under the Directions issued by the Dispute Resolution Panel (DRP), made an addition of ?15,918,919 to the assessee's total income based on Chapter X of the Income-tax Act, 1961. The assessee contended that its Transfer Pricing Documentation approach was not appropriately considered. The Tribunal found that the assessee consistently followed a methodology of segregating costs and recharging them with a markup to its associated enterprises. This method was accepted in previous and subsequent years, and thus, the Tribunal held that no adjustment was warranted for the software distribution segment.

2. Attribution of Service Revenue:
The AO, under DRP's directions, incorrectly attributed service revenue of ?42,902,028 to the Software Development segment instead of the Software Distribution segment. The DRP held that no service revenue from the Associated Enterprise (AE) was attributable to the Sales & Marketing and Delivery Services cost centres of the appellant. The Tribunal noted that the assessee consistently followed a methodology where costs and revenues from specific cost centres were grouped under the software distribution segment and charged to AE with an 18% markup. The Tribunal accepted this methodology and held that the revenue should be attributed to the Software Distribution segment.

3. Allocation of Costs Relevant to Revenue Segments:
The AO, under DRP's directions, attributed revenue to the Software Development segment without attributing the relevant costs, leading to an upward adjustment of ?2,04,25,144. The Tribunal found that the assessee's methodology of cost allocation was consistent and accepted in previous years. The Tribunal held that the costs related to Sales & Marketing, Delivery Services, and Client Care should be attributed to the Software Distribution segment, and the corresponding revenue should also be attributed to this segment. Consequently, the addition made by the AO/TPO/DRP was deleted.

4. Use of Single-Year vs. Multiple-Year Data for Comparables:
The AO used single-year data for comparables instead of multiple-year data. The Tribunal upheld the use of contemporaneous data, following various decisions of the Tribunal against the assessee's plea for multiple-year data.

5. Inclusion of Loss-Making Companies in Comparables:
The Revenue's appeal questioned the inclusion of a persistent loss-making company in the comparables. The DRP directed the inclusion of Nouveau Global Ventures, which was not persistently loss-making, in the final set of comparables. The Tribunal found no error in this direction and dismissed the Revenue's ground of appeal.

6. Treatment of Forex Exchange Fluctuations:
The Tribunal held that Forex exchange fluctuations should be treated as operating income for transfer pricing purposes, following the decision in Approva Systems Pvt. Ltd. Vs. DCIT.

7. Selection of Functionally Comparable Companies:
The assessee contested the selection of certain companies as comparables, arguing they were not functionally similar. The Tribunal excluded Infobeans Systems Pvt. Ltd., Persistent Systems Ltd., Cybercom Datamatics Information Solutions Ltd., and Cybermate Infotek Ltd. from the final set of comparables, as they were engaged in different activities or had extraordinary events affecting comparability. The AO/TPO was directed to give consequential effect to the Tribunal's directions and delete the adjustment made in respect of the software development segment.

Conclusion:
The appeal of the assessee for the assessment year 2011-12 was allowed, the appeal of the Revenue for the same year was dismissed, and the appeal of the assessee for the assessment year 2012-13 was partly allowed. The Tribunal's order emphasized consistency in methodology and the proper allocation of costs and revenues to the relevant segments.