2022 (11) TMI 1104 - AT - Income Tax

TP Adjustment - Foreign exchange fluctuation gain - treated as operating income while computing the operating profit margin - recourse to Safe Harbour Rules - HELD THAT - As firstly Safe Harbour Rules can be applied only at the option of the assessee and not otherwise. In any case of the matter, in the facts of the present appeal, TPO has made adjustment without taking recourse to Safe Harbour Rules. That being the case, contention of CIT(DR) cannot be accepted. Before us, assessee has furnished a working to demonstrate that, in case, foreign exchange fluctuation gain is treated as operating income, assessee s margin would be 7.88%, which will come within the range of 3% of average operating profit margin of comparables worked out at 9.91%. AO is directed to verify the working and delete the addition. TP adjustment on account of delayed receivables from AE - assessee received remittances after expiry of credit period - re-characterizing the delay in receipt of receivables as unsecured loan, the AO computed interest by applying rate of 4.33% on the basis of 6 months LIBOR with a mark-up of 400 basis points - HELD THAT - We agree with CIT (DR) that there may be instances where the AE is benefited due to delay in remitting the outstanding receivables, however, it depends upon the facts of each case. In the present case, admittedly, the assessee has very negligible interest liability. On perusal of materials placed before us, it is observed that the only borrowing made by the assessee is loan availed for purchasing vehicle. There is no dispute that the assessee had utilized the loan for the purpose of which it was availed and paying interest on that. Further, on perusal of the documents placed before us, it is observed that in the year under consideration, the assessee has paid interest of small amount - Thus, from the aforesaid facts it is clear that the assessee is more or less a debt free company, whereas, it has substantial reserve and surplus. Thus we hold that no adjustment on account of interest on outstanding receivables can be made in the facts of the present appeal. Accordingly, we delete the adjustment.

Summary

Issues:
1. Treatment of foreign exchange fluctuation gain as operating income.
2. Transfer pricing adjustment on delayed receivables from associated enterprises.

Analysis:

Issue 1: Treatment of foreign exchange fluctuation gain as operating income
The appeal challenged the final assessment order for the assessment year 2014-15, focusing on whether foreign exchange fluctuation gain should be considered operating income while computing the operating profit margin. The assessee, a BPO entity, provided services to its Associated Enterprises (AE) and benchmarked the transaction using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) proposed an adjustment by excluding foreign exchange gain as nonoperating income. Despite the DRP's direction to treat it as operating income, the TPO disagreed. However, the Tribunal in previous years' cases directed considering foreign exchange gain as operating income. The Tribunal held that the issue was settled in favor of the assessee based on previous decisions and rejected the CIT(DR)'s argument regarding Safe Harbour Rules, emphasizing that they were not applicable in this case. The Tribunal directed the Assessing Officer to verify the working and delete the addition.

Issue 2: Transfer pricing adjustment on delayed receivables
The second issue involved a transfer pricing adjustment on delayed receivables from AE, treated as unsecured loans by the Assessing Officer. The DRP upheld the adjustment, but the assessee argued that the delayed receivables were closely linked to BPO services and should not be treated separately. They also highlighted the absence of substantial interest liability due to the company's debt-free status. The Tribunal considered the facts presented, noting the minimal interest liability and substantial reserve and surplus of the company. Relying on previous decisions, the Tribunal held that no adjustment for interest on outstanding receivables was warranted and deleted the adjustment. The appeal was allowed, and the order was pronounced on 19th October 2022.