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2022 (8) TMI 1524 - AT - Income TaxTP Adjustment - comparable selection - Accentia Technologies Limited, Acropetal Technologies Limited, Cosmic Global Limited, Crossdomain solutions private limited, Infosys BPO limited - HELD THAT - We hold that the above four entities cannot be good comparables to the assessee and they are to be excluded. We accordingly direct the AO/Ld. TPO to exclude the same from the final list of comparables and recomputed the margins for determining the arm s-length price. Treatment of Foreign Exchange Gain - Direct AO/TPO to consider the foreign exchange gain as operating in nature for calculating the margin of the assessee.
Issues Involved:
1. Determination of the arm's-length price (ALP) for international transactions. 2. Treatment of foreign exchange gain as operating or non-operating in nature. 3. Inclusion/exclusion of certain comparables in the transfer pricing analysis. Detailed Analysis: 1. Determination of the Arm's-Length Price (ALP): The core issue revolves around the determination of the ALP for the services provided by the assessee to its Associated Enterprises (AEs). The assessee, engaged in providing low-end IT-enabled services (ITeS) like data entry and analysis, filed a return declaring a total income of Rs. 26,252/-. The Transfer Pricing Officer (TPO) initially made an adjustment of Rs. 3,36,21,812/-, which was later reduced to Rs. 3,05,39,702/- by the Dispute Resolution Panel (DRP). The Tribunal noted inconsistencies in the Revenue's stance across different assessment years regarding the nature of services rendered under the same agreement. The Tribunal set aside the final assessment order and remanded the issue back to the Assessing Officer (AO)/TPO for fresh adjudication, considering the TPO's order from a subsequent period. 2. Treatment of Foreign Exchange Gain: The assessee contested the TPO's decision to treat foreign exchange gain as non-operating in nature, which reduced the operating margin from 11.50% to 9.15%. The Tribunal, referencing its own earlier decision and the case of SAP LABS India (P) Ltd, held that foreign exchange gain is directly linked to the export business and should be treated as operating income. Consequently, the Tribunal directed the AO/TPO to consider the foreign exchange gain as operating in nature for margin calculation. 3. Inclusion/Exclusion of Certain Comparables: The assessee disputed the inclusion of several entities as comparables, arguing functional dissimilarity. The entities in question were Accentia Technologies Limited, Acropetal Technologies Limited, Cosmic Global Limited, and Infosys BPO Limited. The Tribunal reviewed these objections as follows: - Accentia Technologies Limited: The Tribunal found functional dissimilarity due to the company's involvement in HRCM services and its acquisition activities, leading to super normal profits. The Tribunal directed the exclusion of this entity. - Acropetal Technologies Limited: The Tribunal noted that this company provides engineering design services, which are high-end and not comparable to the assessee's low-end ITeS. The Tribunal directed its exclusion. - Cosmic Global Limited: The Tribunal observed that this company derives a significant portion of its revenue from translation charges and involves outsourcing activities, making it functionally dissimilar. The Tribunal directed its exclusion. - Infosys BPO Limited: The Tribunal highlighted the significant differences in scale, brand value, and asset base between Infosys BPO and the assessee. It concluded that Infosys BPO is not functionally comparable and directed its exclusion. The Tribunal's decision to exclude these entities from the list of comparables was based on detailed functional analysis and precedents from earlier cases involving the assessee. The AO/TPO was directed to recompute the margins and determine the ALP accordingly. Conclusion: The appeal was allowed for statistical purposes, with the Tribunal directing a fresh adjudication on the ALP determination, considering the foreign exchange gain as operating income and excluding the disputed comparables. The judgment underscores the importance of consistency in the Revenue's stance and a thorough functional analysis in transfer pricing cases.
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