2020 (9) TMI 918 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is a captive service entity engaged in rendering marketing support and general administrative support services (as technical support services) and software development services to its overseas AEs , thus companies functionally dissimilar with that of assessee need to be deselected from final list. Companies with high turnover need to be excluded. Amortization of goodwill - whether expenditure/amortization of goodwill is not part of segmental operating cost? - HELD THAT - Assessee should have allocated the unallocated expenses in the ratio of 85.15 14.85 between the segments (which is the ratio of operating revenue). In the given case the amortisation of goodwill is not an operating expenses, it should be allocated based on the segmental revenue between the segments and accordingly we are directing the TPO to allocate 14.85% of the amortized value of goodwill for this year to the software and Development Services Segment. In order to carry out the TP study, it is relevant to determine the operating margin of the segment before it can be compared with other comparative companies. The assessee has arrived the margin of the R D segment at 12% by allocating the unallocated expenses without proper basis. When we allocate the unallocated expenses in the operating revenue basis, we will know the exact operating profit from the segment and then the TP analysis can be carried out based on the updated segment results. Accordingly, we are directing AO/TPO to calculate the updated segment results and do TP adjustment. Accordingly, the ground raised by the assessee is partly allowed. Foreign exchange fluctuation - difference in the exchange rate on the date of raising of invoices and exchange rate on the date of realization of invoice - assessee submitted that it used to raise the invoices for services rendered in USD equivalent to Indian rupees recorded in its books of accounts - HELD THAT - Forex loss reported by the assessee in segment reporting as operating expenditure and since assessee has surrendered the same in income tax computation, the same has to be eliminated from the operating expenses. We are in agreement with the submission of the Ld. AR that this reversal of expenditure will have a direct impact on operating expenses declared by the assessee. When the AO accepts the segment reporting reported by the assessee and forex loss as part of operating expenses, the same expenses were surrendered by the assessee as non-deductible expenses then, this expenses should also be removed from the operating expenses in the segment statement. Accordingly, we direct TPO to eliminate the forex loss declared by the assessee as operating expenses and rework the operating profit of the R D segment. Since the assessee has declared ₹ 71.18 lakhs as Forex loss for this segment and we noticed that assessee has declared the loss voluntarily, we direct TPO to remove the forex loss from the calculation and then rework the operating profit of the segment and do the TP adjustment accordingly.

Summary

Issues Involved:
1. Inclusion of Infosys as a comparable company for Transfer Pricing (TP) analysis.
2. Adjustment of amortization of goodwill in the segmental results for TP purposes.
3. Treatment of foreign exchange fluctuation losses in the segmental reporting for TP analysis.

Issue-wise Detailed Analysis:

1. Inclusion of Infosys as a Comparable Company for Transfer Pricing Analysis:
The assessee contested the inclusion of Infosys Ltd. as a comparable company by the Transfer Pricing Officer (TPO). The TPO included Infosys, Wipro Technologies Ltd (segmental), and E-Zest Solutions Limited as comparables, resulting in an arithmetic mean margin of 22.72%, significantly higher than the assessee's margin of 12%. The assessee argued that Infosys, with a turnover of ?25,385 crores, was not comparable due to its significantly larger size, different functions, risks, and assets. The Dispute Resolution Panel (DRP) had previously excluded Infosys in similar cases for subsequent assessment years. The Tribunal agreed with the assessee, citing consistent ITAT and court rulings that size and turnover are crucial for comparability. Thus, the Tribunal directed the TPO to exclude Infosys from the list of comparables and rework the Arm's Length Price (ALP) benchmark.

2. Adjustment of Amortization of Goodwill in the Segmental Results for TP Purposes:
The assessee claimed amortization of goodwill amounting to ?45,51,139 during the year, which was disallowed in the computation of income for tax purposes. The TPO included this amortization as part of the operating expenses in the segmental results for the TP study. The assessee argued that non-operating expenses like goodwill amortization should not be included in the operating cost for TP analysis. The Tribunal noted that the amortization of goodwill is not an operating expense and should be excluded from the segmental operating cost. The Tribunal directed the TPO to allocate unallocated expenses based on the ratio of segmental revenue and exclude non-operating expenses like goodwill amortization while determining the operating profit for the TP study.

3. Treatment of Foreign Exchange Fluctuation Losses in the Segmental Reporting for TP Analysis:
The assessee reported foreign exchange fluctuation losses in its segmental results, which were later voluntarily disallowed in the computation of taxable income. The assessee argued that these losses, being non-operating expenses, should be excluded from the operating cost for TP purposes. The Tribunal observed that the forex losses were initially included in the segmental reporting as operating expenses but were subsequently disallowed in the tax computation. The Tribunal agreed with the assessee that these losses should be eliminated from the operating expenses in the segmental results. The Tribunal directed the TPO to exclude the forex losses from the operating expenses and rework the segmental operating profit accordingly.

Conclusion:
The appeals were partly allowed, with the Tribunal directing the TPO to exclude Infosys from the list of comparables, adjust the segmental results by excluding non-operating expenses like goodwill amortization, and eliminate forex losses from the operating expenses in the segmental reporting for TP analysis. The Tribunal's directions aim to ensure a more accurate and fair determination of the ALP, considering the specific circumstances and financial reporting practices of the assessee.