2021 (3) TMI 803 - AT - Income Tax

TP Adjustment - foreign exchange fluctuation gain/loss should be treated as non operating income/expenses for the purpose of computation of Profit Level Indicator (PLI) of the tested party and the comparables - HELD THAT - Tribunal in the case of Ameriprise India (P) Ltd. 2016 (3) TMI 1272 - DELHI HIGH COURT this issue is answered in favour of the assessee and the TPO/AO is directed to determine the ALP of the international transactions afresh after considering forex gain/loss as operating in nature. Ground raised in appeal by the assessee is allowed. Comparability - HELD THAT - Cat Technologies Limited - As going by the submissions of assessee that Cat Technologies Limited is persistent loss making company only, if forex is taken as non-operating in nature. In the foregoing paragraphs while deciding Ground No.4 in this appeal, we have already arrived at the findings that forex has to be taken as operating in nature. In such scenario, the Ld. Counsel did submit that Cat Technologies Limited will not be considered as persistent operating loss making company. Taking the totality of facts and circumstances, we direct the TPO/AO to include this company i.e. Cat Technologies Limited in the final set of comparables with that of the assessee. Evoke Technologies Pvt. Ltd. - As assessee who included this company in the list of comparables. As such, the primary burden of proving comparability was on it. It is just elementary that comparability can be established with reference to various factors. Apart from filters, it is essential to consider the nature of business of the company and other qualitative information, such as, related party transactions, mergers and acquisition etc. if any and the detailed composition and manner of revenue recognition, which predominantly help in deciding the comparability. Such qualitative information can be obtained only from the Annual Report of the company for the relevant year. Simply relying on the quantitative figures for the year under consideration with reference to the Annual Report of the company for the succeeding year does not in any manner assist in deducing the qualitative information and the resultant comparability. It is a matter of record and admitted position that the assessee did not furnish Annual Report of the Company before the Authorities below which could have assisted them in ascertaining the comparability of this company with that of the assessee. The same position is continuing before the Tribunal as well. Since the assessee failed to prove the comparability with reference to the Annual Report of this company, we are satisfied that the Authorities below were justified in excluding this company in the final list of comparables. Maveric Systems Ltd - The assessment year under consideration is 2014-15 with the corresponding F.Y. 2013-14. Since the unit got physically moved during June 2014 i.e. in the succeeding financial year, the factor of relocation of its SEZ unit cannot be considered as extraordinary event for the year. However, it is also an admitted position that this company received compensation on account of such relocation which was shown as income during the year in the P L account under Exceptional item , but was not considered as operating revenue. Since this income on account of relocation relates to the very fact of relocation, the income on account of such relocation also needs to be considered as item of operating revenue. Though the assessee was contesting before the Authorities below that the income of ₹ 4.96 Crore should not be taken as operating revenue, but, it was fairly conceded by the Ld. AR before the Tribunal that this income can be included in the operating revenue of this company for the purpose of determining its PLI. We, therefore, direct to include this company in the final list of comparables. Further, we clarify that in computing the PLI of this company, income of ₹ 4.96 Crore should also be taken as a part of operating revenue. Persistent Systems Limited - Materials available on record that this company is functionally not comparable with that of the assessee company and more so because, segment wise information regarding product or services are not available in respect of this company. Therefore, we direct the AO/TPO to exclude Persistent Systems Limited from the final list of comparable companies with regard to its software development service segment. Thirdware Solutions Limited is to be excluded. TP adjustment has to be done restricting to the proportion of transaction with Associated Enterprises only - Hon‟ble Bombay High Court in the case of CIT Vs. Hindustan Unilever Ltd 2016 (7) TMI 1245 - BOMBAY HIGH COURT has observed that Transfer Pricing adjustment has to be done only in respect of international transaction with Associated Enterprises. The Pune Bench of the Tribunal in the case of DCIT Vs. Magna Steyr India P. Ltd. 2018 (10) TMI 1886 - ITAT PUNE had occasion to refer the decision of the Hon‟ble Bombay High Court in the case of CIT Vs. Thysseen Krupp Industries India Pvt. Ltd., 2015 (12) TMI 1076 - BOMBAY HIGH COURT wherein it has been held the transfer pricing adjustment, if any, has to be made vis- -vis associated enterprises transaction and not on entity level. Accordingly, Pune Bench of the Tribunal directed AO/TPO to re-compute the ALP of international transactions of the assessee with its associated enterprises on the basis of the transactions with associated enterprises only. Respectfully following the above referred judicial pronouncements, we direct the AO/TPO to determine the TP adjustment, if any, to be restricted to the international transactions of the assessee with its Associated Enterprises only

Summary

Issues Involved:
1. Transfer pricing adjustment of ?34,97,73,866.
2. Inappropriate use of contemporaneous data and single year data.
3. Inappropriate application/modification of certain filters.
4. Considering foreign exchange fluctuation as non-operating.
5. Rejection of companies selected as comparable.
6. Selection of non-comparable companies.
7. Rejection of additional comparable companies.
8. Rejection of risk adjustment.
9. Adjustment proportionate to transactions with Associated Enterprises.
10. Benefit of +/- 3% under section 92C(2).
11. Incorrect computation of income and tax demand.
12. Erroneous levy of interest.
13. Penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant challenged the transfer pricing adjustment of ?34,97,73,866 for software development services to its Associated Enterprises (AEs). The Tribunal noted that the Transfer Pricing Officer (TPO) found faults in the Transfer Pricing (TP) study report and used various filters to select comparables, resulting in an adjustment of ?34,97,73,866.

2. Use of Contemporaneous Data:
The appellant did not press this ground, and it was dismissed as "not pressed."

3. Application/Modification of Filters:
The appellant did not press this ground, and it was dismissed as "not pressed."

4. Foreign Exchange Fluctuation:
The appellant contended that foreign exchange gain/loss should be treated as operating income/expenses. The Tribunal referred to multiple judicial pronouncements, including the Pune Bench's decision in Extentia Information Technology Pvt. Ltd. and the Delhi High Court's decision in Ameriprise India Pvt. Ltd., which supported the appellant's contention. The Tribunal directed the TPO/AO to consider foreign exchange gain/loss as operating in nature.

5. Rejection of Comparable Companies:
The appellant sought the inclusion of Cat Technologies Limited, Evoke Technologies Private Limited, and Maveric Systems Limited. The Tribunal directed the inclusion of Cat Technologies Limited, noting it was not a persistent loss-making company if forex was considered operating. However, Evoke Technologies Pvt. Ltd. was excluded due to the absence of the annual report for FY 2013-14. Maveric Systems Ltd. was included, with the Tribunal directing the inclusion of relocation compensation in operating revenue.

6. Selection of Non-comparable Companies:
The appellant contested the inclusion of Persistent Systems Limited and Thirdware Solutions Limited. The Tribunal, following previous decisions, directed the exclusion of Persistent Systems Limited due to its functional dissimilarity and lack of segmental information. Similarly, Thirdware Solutions Limited was excluded due to its involvement in product sales and lack of segmental data.

7. Rejection of Additional Comparable Companies:
The appellant did not press this ground, and it was dismissed as "not pressed."

8. Rejection of Risk Adjustment:
The appellant did not press this ground, and it was dismissed as "not pressed."

9. Proportionate Adjustment:
The Tribunal directed that TP adjustments should be restricted to transactions with AEs only, following the Bombay High Court's decision in Firestone International (P.) Ltd. and other judicial pronouncements.

10. Benefit of +/- 3%:
The Tribunal did not adjudicate this ground as it was consequential.

11. Incorrect Computation of Income:
The appellant did not press this ground, and it was dismissed as "not pressed."

12. Erroneous Levy of Interest:
The Tribunal did not adjudicate this ground as it was consequential.

13. Penalty Proceedings:
The Tribunal did not adjudicate this ground as it was premature.

Conclusion:
The appeal was partly allowed for statistical purposes, with significant directions on the treatment of foreign exchange fluctuations, inclusion/exclusion of specific comparables, and restricting TP adjustments to transactions with AEs only.