2020 (12) TMI 1149 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Acropetal Technologies Limited - There is no objection with regard to this comparable however the DRP suo moto excluded the above company from the list of comparables though it satisfies all the criteria adopted by the TPO. In our opinion, suo moto exclusion of this company by DRP is not proper and there is also no objection from the assessee. Accordingly, we direct the TPO to include this company as comparable in the list of comparables for determining the ALP. E-Infochips Limited - In the present case, the assessment year involved is 2011-12; as rightly pointed out by the ld.AR, the revenue from software development services is less than 75% and it is having revenue both from software development and software services and also segmental data was not available. In these circumstances, it cannot be included as comparable in the list of comparables. Accordingly, the exclusion by the DRP is justified. L T Infotech Limited - This company is not functionally comparable to the assessee's case as the company L T Infotech Limited is predominantly engaged in onsite software development - Accordingly, the exclusion of this company from the comparison list by DRP is justified. R S Software Limited - when the assessee as well as the TPO excluded it as comparable without any objection by the assessee, it cannot be excluded by the DRP. Accordingly, this company is to be included as a comparable. The exclusion of this company as comparable suo moto by the DRP cannot be approved. We direct the TPO to include this company in the list of comparables. Acropetal Technologies Limited - We direct the TPO to exclude this company from the list of comparables. Jeevan Scientific Technologies Ltd. and I-Gate Global Solutions Limited - No serious argument was put forth by the ld. DR. Accordingly the exclusion of these two comparables by the DRP is justified. We direct the TPO to exclude these two companies as comparables from the list of comparables. Net profit margin realized by the tax payer in the international transactions - foreign exchange transactions to be considered as operating in nature - HELD THAT - This issue was considered by this Tribunal in Cisco Systems Services BE 2014 (10) TMI 852 - ITAT BANGALORE wherein it was held that the foreign exchange fluctuation gain arising to the assessee on realization of trade debtor, payment to creditor, etc. were nothing but operational income. On the same analogy, we are of the opinion that the foreign exchange gain or loss relating to the trading transaction of the assessee should be considered as operating income/expenses. Being so, we are upholding the finding of the DRP on this issue. The ground of appeal taken by the Revenue is rejected.

Summary

Issues:
- Appeal against directions of the Dispute Resolution Panel (DRP) and order passed by the Assessing Officer under the Income Tax Act, 1961 for Assessment Year 2011-12.
- Exclusion of specific comparables from the list of comparables for determining the Arm's Length Price (ALP) in the Software Development Segment.
- Inclusion/exclusion of certain comparables in the ITES Segment.
- Treatment of foreign exchange transactions as operating income.

Exclusion of Specific Comparables in Software Development Segment:
- Acropetal Technologies Limited: The DRP excluded this company from comparables despite meeting TPO criteria. Tribunal directed inclusion as there was no objection from the assessee.
- E-Infochips Limited: DRP excluded it based on service income percentage, upheld by Tribunal due to lack of segmental data and functional comparability.
- Infosys Limited: Excluded by DRP due to functional differences and high turnover, upheld by Tribunal citing brand value and turnover differences.
- L & T Infotech Limited: TPO rejected it due to high turnover and functional dissimilarity, upheld by Tribunal based on previous decisions.
- R S Software Limited: Assessee and TPO excluded it, DRP's exclusion overturned by Tribunal as there were no objections.

Inclusion/Exclusion of Comparables in ITES Segment:
- Acropetal Technologies Limited: Excluded due to functional dissimilarity, consistent with previous decisions.
- Jeevan Scientific Technologies Ltd. and I-Gate Global Solutions Limited: Excluded by DRP, upheld by Tribunal due to lack of substantial arguments.

Treatment of Foreign Exchange Transactions:
- Tribunal upheld DRP's decision that foreign exchange gains/losses related to trading transactions should be considered as operating income/expenses, in line with previous rulings.

In conclusion, the appeal by the Revenue was partly allowed, with specific directions given regarding the inclusion/exclusion of comparables in both the Software Development and ITES Segments, as well as the treatment of foreign exchange transactions as operating income. The Tribunal's decision was based on a thorough analysis of functional comparability, turnover differences, and previous rulings on similar issues.