2023 (3) TMI 1295 - AT - Income Tax

TP adjustment - international transaction of provision of IT enabled data conversion services - assessee adopted TNMM as the most appropriate method for demonstrating that this international transaction - assessee pleaded that foreign exchange fluctuation gain should have been considered as operating revenue of the assessee as well as that of the comparables - HELD THAT - In light of the business profile of the assessee, this contention raised on behalf of the assessee about inclusion of foreign exchange gains in operating revenue finds merit. Apparently, it seems that foreign exchange gain earned by the assessee is in relation to the revenue earned from its AE in connection with provision of ITES. We find that foreign exchange gain directly results from consideration received from rendering ITES to AE and therefore, we fail to understand how such foreign exchange fluctuation gain should be considered as non-operating. Since the TPO has computed PLI of the assessee as well as comparables by ignoring the amount of forex gains, we set aside the impugned order and remit the matter back to the file of the AO/TPO to recompute assessee s margin as well as that of comparables by considering forex gain as an item of operating revenue. It would be pertinent to make it clear that our direction is restricted to consider forex gain from transactions of revenue nature only as part of operating revenue. If some part of forex gains is found to be relatable to transactions on capital account, then that part should be excluded from the operating revenue. Selection of comparable companies - Eclerx Services Limited, ICRA Techno Analytics Limited, Acropetal Technologies Limited - A close look at the business profile of the three comparable companies mentioned elsewhere shows that the services offered by these companies are in the nature of ITES only. In fact, we are unable to understand how single customer business (like that of the assessee) affects the functional similarity of the company. The assessee is having single customer business and so also TCS E-Serve Limited, Eclerx Services, which offers ITE services to city group. Similar is the case of ICRA Techno Analytics Limited and Acropetal Technologies Limited. Inclusion of CG Vak Software and Exports Limited and Calibre Business Point Business Solutions Ltd. - High turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. Inclusion of R System International Ltd, Jindal Intelicom Private Limited and Calibre Business Point Business Solutions - We set aside the impugned order and remit the matter to the file of TPO/AO for examining this aspect of the matter. It is clarified that only if the assessee succeeds in providing the relevant data of these companies for the concerned financial year on the basis of the information available from their Annual reports only, the TPO should include these companies in the list of comparables by considering their OP/OC on the basis of the financial year ending 31.3.2010. If however, even though their quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then these companies should not be considered as comparable. Exclusion of Cosmic Global Limited and Informed Technologies India Ltd. - In so far as Cosmic Global Limited is concerned, we find that this Tribunal in earlier years i.e. Assessment Years 2009 10 and 2010 11 has held that export earnings filter need not be applied which has been followed by the DRP and, therefore we do not find any merit in exclusion of these comparables and it will remain in the final set of comparables Informed Technologies India Limited is concerned, it is contended that the turnover of this company is more than Rs. 1 crore and, therefore, passes turnover filter applied by the Assessing Officer whereas the TPO has rejected because this company does not pass turnover filter. It appears that this company was rejected by the TPO on the basis of turnover filter in show cause notice itself. Therefore, the DRP has directed to verify the turnover and decide the inclusion/exclusion of this company after affording reasonable opportunity of being heard to the assessee. We do not find any error or infirmity in such direction of the DRP and, we accordingly direct the TPO/Assessing Officer. We set aside the impugned order and remit the matter for determination of ALP of the international transaction of provision of ITE data conversion services to the file of the AO/TPO for fresh decision in accordance with our above observations/directions after affording adequate opportunity of being heard to the assessee. Interest on a delayed/Non-realization of export proceeds - HELD THAT - TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, since the assessee has entered into an agreement with its AE for realization of invoices within the period of 150 days, therefore the interest amount of non-realization of invoices upto 150 days appears to have been factored in the price charged for the services rendered. Interest should be charged in excess of 150 days - This is also additional/ supplementary grounds taken by the assessee at 4.1.5. We, accordingly direct the AO/TPO to charge interest for delay of more than 150 days, which means that any delay above 150 days should be considered as a separate international transaction in terms of Clause C of Explanation to section 92B of the Act. Rate of interest - We find that this issue is covered by the decision of Cotton Natural I Pvt Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT as held that it is the currency in which loan is to be repaid which determine the rate of interest and hence prime lending rate should not be considered for determining interest-rate. We, therefore, set aside the impugned issue and remit the matter back to the file of the TPO/AO for fresh determination of addition on account of TP adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations.

Summary

Issues Involved:
1. Validity of the transfer pricing order and assessment orders.
2. Determination of total income and upward adjustment.
3. Natural justice and rectification application.
4. Interest on credit period and characterization of outstanding receivables.
5. Economic analysis and benchmarking of international transactions.
6. Use of single year data vs. multiple year data.
7. Application of arbitrary filters for comparables.
8. Selection of functionally different comparables.
9. Rejection and inclusion of certain comparables.
10. Inclusion of super normal profit companies.
11. Treatment of foreign exchange gains/losses and doubtful debts.
12. Adjustment to arm's length price and application of the 5 percent range.
13. Adjustments for risk profile differences.
14. Working capital adjustment.
15. Export earning filter and inclusion of certain companies.
16. Calculation of interest on receivables.

Detailed Analysis:

1. Validity of the Transfer Pricing Order and Assessment Orders:
The assessee argued that the transfer pricing order and subsequent assessment orders are "bad in law and void ab-initio." This contention was based on procedural grounds and the alleged failure of the authorities to address the rectification applications.

2. Determination of Total Income and Upward Adjustment:
The AO determined the total income of the assessee at INR 4,38,56,650/- against the returned income of INR 18,05,090/-, resulting in an upward adjustment of INR 4,20,51,556/-. This significant adjustment was contested by the assessee.

3. Natural Justice and Rectification Application:
The assessee claimed that the DRP/TPO/AO ignored the principle of natural justice by not addressing the contentions related to the rectification application. This issue highlighted procedural lapses in the handling of the case.

4. Interest on Credit Period and Characterization of Outstanding Receivables:
The DRP/TPO/AO were alleged to have erred by identifying outstanding receivables as a separate international transaction and re-characterizing them as loans to associated enterprises (AEs). They applied the CUP method and used 6 months LIBOR plus 250 basis points as the interest rate on these receivables. The Tribunal directed the AO/TPO to charge interest only for delays exceeding 150 days, as per the inter-company agreement.

5. Economic Analysis and Benchmarking of International Transactions:
The DRP/TPO/AO rejected the economic analysis conducted by the assessee and conducted a fresh analysis for IT-enabled data conversion services. The Tribunal found merit in the assessee's argument that foreign exchange gains should be considered as operating revenue, remitting the matter back for recomputation.

6. Use of Single Year Data vs. Multiple Year Data:
The authorities used single-year data for FY 2010-11, which the assessee argued was not available at the time of documentation. The Tribunal did not specifically address this issue but emphasized the need for accurate and relevant data.

7. Application of Arbitrary Filters for Comparables:
The TPO applied arbitrary filters, including turnover less than INR 1 Crore, different accounting years, and peculiar economic circumstances. The Tribunal found that such filters should not exclude functionally comparable companies.

8. Selection of Functionally Different Comparables:
The assessee contested the inclusion of certain companies as comparables, arguing they were functionally different. The Tribunal examined each contested company and found that the services offered were in the nature of ITES, thus upholding their inclusion.

9. Rejection and Inclusion of Certain Comparables:
The Tribunal directed the inclusion of CG Vak Software and Exports Ltd and Calibre Business Point Solutions Ltd, following the principle that low turnover alone is not a reason for exclusion if functional comparability is established.

10. Inclusion of Super Normal Profit Companies:
The Tribunal followed the principle that high profit or high turnover is not a criterion for exclusion if the company is otherwise comparable, rejecting the exclusion of such companies.

11. Treatment of Foreign Exchange Gains/Losses and Doubtful Debts:
The Tribunal agreed with the assessee that foreign exchange gains should be considered as operating revenue, remitting the matter for recomputation.

12. Adjustment to Arm's Length Price and Application of the 5 Percent Range:
The Tribunal did not specifically address this issue but emphasized the need for accurate determination of the arm's length price.

13. Adjustments for Risk Profile Differences:
The Tribunal found that the assessee did not sufficiently demonstrate that the comparables bore more risks, thus denying the risk adjustment.

14. Working Capital Adjustment:
The Tribunal did not specifically address this issue but remitted related matters for fresh determination.

15. Export Earning Filter and Inclusion of Certain Companies:
The Tribunal upheld the inclusion of companies like Cosmic Global Limited and Informed Technologies India Ltd, rejecting the export earning filter of 75%.

16. Calculation of Interest on Receivables:
The Tribunal directed the AO/TPO to apply LIBOR instead of PLR for calculating interest on receivables, remitting the matter for fresh determination.

Conclusion:
The appeals were allowed in part for statistical purposes, with several issues remitted back to the AO/TPO for fresh determination in line with the Tribunal's observations. The Tribunal emphasized the need for accurate and relevant data, functional comparability, and adherence to principles of natural justice.