9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (1) TMI 947 - AT - Income TaxTP Adjustment - determination of Arm's Length Price(ALP) in respect of international transaction of rendering of Software Development Services by the Assessee to its Associated Enterprise (AE) - Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) - transaction of rendering software development services by the Assessee to its AE was a transaction with an Associated Enterprise (AE) and was therefore an international transaction - HELD THAT - Genesys International Corpn. Ltd., Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd.be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. Comparable company ICRA Techno Analytics Ltd. exclusion of the said company was sought by the Assessee before CIT(A) on the ground of functional comparability. CIT(A) has however excluded this company on the basis of export turnover filter. It is also the claim of the Assessee that the related party transaction in the case of the aforesaid company was more than 25%. As far as the request of the Revenue that the export sales to turnover of this company is 92% and therefore passes the test of export turnover filter being at least 75% or more of the total turnover. We are of the view that the comparability of this company has not been properly analyzed and hence the comparability of this company is set aside to the TPO/AO to be considered afresh on both the functional filter as well as RPT and export turnover filter. Exclusion of Mindtree Ltd. from the list of comparable companies - Assessee has no objection to its inclusion in the list of comparable companies of the TPO. Hence, this company is directed to be included in the list of comparable companies. Exclusion of M/s. Datamatics Global Services Ltd. - Assessee sought exclusion of this company before CIT(A) on the ground that this company is functionally different from that of the Assessee. CIT(A) has however in his order excluded this company on the basis that this company's export sales are 58% of the total turnover and therefore the company fails the application of export turnover filter. As far as the request of the Revenue that the export sales to turnover of this company is 98% and therefore passes the test of export turnover filter being at least 75% or more of the total turnover. After hearing the rival submissions, we are of the view that the comparability of this company has not been properly analyzed and hence the comparability of this company is set aside to the TPO/AO to be considered afresh on both the functional filter as well as export turnover filter. Exclusion of M/s. Sasken Communication Technologies Ltd. CIT(A) excluded this company after finding that this company was functionally different. Comparability need not be exact and that the requirement of law is only similar companies. We are of the view that the functional comparability not having been disputed, the plea taken by the revenue deserves to be rejected. Treatment of foreign exchange gain as part of the operating profit of the Assessee - HELD THAT - As decided in own case 2019 (8) TMI 350 - ITAT BANGALORE we feel it proper to restore the matter back to the file of AO/TPO for fresh decision with the direction that if it is found that foreign exchange fluctuation gain/loss of the tested party i.e. of the assessee or of the comparable companies is in respect of the current year's turnover then the same should be considered for TP analysis but if such gain/loss is not in respect of current year's turnover, then the same should be ignored in case of both i.e. the tested party and of the comparable companies. In case the data in this regard regarding comparable company is not made available by the assessee, then it should be presumed that such foreign exchange gain/loss for comparable company is not in respect of current year's turnover because generally, the accounting of foreign exchange gain/loss is considered in the sales only if such gain/loss has been received in the year of sale itself and only when such gain/loss is received and accounted for in a later year then only the same is accounted for separately as exchange fluctuation gain/loss.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services. 2. Selection of Comparable Companies. 3. Treatment of Foreign Exchange Gain/Loss as Operating Profit. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for Software Development Services: The core issue in these cross appeals is the determination of the ALP for the international transaction of rendering Software Development Services (SWD Services) by the Assessee to its Associated Enterprise (AE). Both parties agreed that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determining the ALP, using Operating Profit/Total Cost (OP/TC) as the profit level indicator. The Assessee's OP/TC was 14.93%. The Transfer Pricing Officer (TPO) selected 10 comparable companies, resulting in an average markup of 22.63% (adjusted to 22.52% after working capital adjustment). This led to an ALP of ?63,45,86,829, with a shortfall of ?6,39,20,444 added to the total income. 2. Selection of Comparable Companies: The CIT(A) excluded 4 out of the 10 comparable companies chosen by the TPO. The Revenue contested the exclusion of: - Datamatics Global Services Ltd.: CIT(A) excluded this company based on failing the export filter, but the Revenue argued it had 98% export sales. The Tribunal remanded this issue to the TPO/AO for re-evaluation. - ICRA Techno Analytics Ltd.: CIT(A) excluded this company based on the export filter, but the Revenue contended it had 92% export sales. The Tribunal remanded this issue for fresh analysis on functional comparability, related party transactions (RPT), and export turnover. - Mindtree Ltd.: The Tribunal directed the inclusion of this company as the Assessee had no objection. - Sasken Communication Technologies Ltd.: CIT(A) excluded this company due to functional differences. The Tribunal upheld this exclusion as the Revenue did not challenge the functional comparability. The Assessee contested the inclusion of: - Genesys International Corporation Ltd.: The Tribunal excluded this company, noting it was engaged in Geographical Information Services rather than software development. - Infosys Ltd.: Excluded due to its status as a giant risk-taking company with software products and intangible assets. - Larsen & Toubro Infotech Ltd.: Excluded as it was a software product company without segmental information on SWD services. - Persistent Systems Ltd.: Excluded for similar reasons as Larsen & Toubro Infotech Ltd. 3. Treatment of Foreign Exchange Gain/Loss as Operating Profit: The Assessee argued that foreign exchange gain/loss should be considered as part of the operating profit. The Tribunal referred to its previous decision for AY 2010-11 & 2011-12, directing the TPO/AO to re-evaluate this issue. If the foreign exchange gain/loss pertains to the current year's turnover, it should be included in the TP analysis; otherwise, it should be excluded. Conclusion: The Tribunal directed the TPO/AO to re-compute the ALP of the international transaction, considering the exclusions and inclusions of comparable companies as discussed, and to re-evaluate the treatment of foreign exchange gain/loss. The appeals were partly allowed, with specific directions for re-assessment and providing the Assessee an opportunity to be heard.
|
