9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2024 (9) TMI 1119 - AT - Income TaxTP Adjustment - treatment of Foreign exchange gain/loss as non operative in the case of the assessee and also the comparables selected were having the Forex impact - HELD THAT - We observe that the revenue model of the assessee is that they are wholly owned subsidiary of Nokia Corporation and is primarily engaged in the business of assembling, manufacturing, distribution, buying, selling, importing, exporting and repairing of mobile phones and rendering of contract software development services related to only mobile phones. The risk factor in international transactions are considerably reduced to nil and all the exchange risks are being transferred to its holding company. Assessee does not own any risk and any exchange fluctuations in the international transactions are borne by the parent company. With the above risk factor on record, in our considered view, when the assessee gets the revenue as per the contract value and all other risks are mitigated by the AE. The exchange fluctuation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the assessee is not impacted by the currency fluctuations. If there is upward movement, the AE will make suitable adjustment in the contract prices. It is relevant to note that the revenue/ cost model adopted by the AE by suitably taking care of the exchange risk of the subsidiary company, the relevant exchange risk is the cost/revenue to the AE, as and when they compensate the same. This can never a risk factor to the assessee leading to incurring any revenue income or loss to the assessee. This findings is based on the submissions that the transactions are only with the AE s and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by the assessee are only relating to transactions with its own AE. Hence, we are inclined to agree with the findings of tax authorities. Relying on the Safe Harbor Rules by the revenue - The assessee objected by submitting that as per Rule 10TB and 10TC, the assessee has to be a eligible assessee as well as it is applicable only to eligible international transactions. We observed that the DRP has not applied any rules to determine the assessee as eligible assessee. It just referred to the definition of operating expenses to explain the operating revenue and expenses have to have a forex fluctuation risk, otherwise, it cannot be considered as part of operating revenue or expenditure. Therefore, the relevant ground is rejected. Inconsistent approach adopted by TPO in considering exchange/loss as operating in respect of comparable companies whereas it is considered as non operative in the case of the assessee - We observe from the findings of the Ld DRP that they have analysed the comparable company wise and gave a clear and detailed findings. The contentions of the assessee are properly dealt by the Ld DRP in their findings. Therefore, the relevant contentions raised by the assessee are rejected. When the risk is not borne by the assessee as in the present case, it cannot rely on the decision where the relevant risks are borne by the respective companies/assessees. Therefore, in our considered view, the case law relied by the assessee are distinguishable to the facts in the present case. Therefore, this contention of the assessee also rejected. Accordingly, the relevant grounds raised by the assessee are dismissed. Final comparables selected by the TPO in the MPA segment - TPO has rejected the Zenith Computers Limited (ZCL) as comparable with the assessee company - TPO has applied filter to eliminate persistent loss making companies as one of the criteria and accordingly, it was observed that this company was making persistent loss in the last three years including current assessment year. The assessee has highlighted that the ZCL has incurred losses in FY 2012-13, 2013-14 and earned profit in FY 2011-12. Therefore, it does fit into the definition of persistent loss making company. On evaluation we observed that ZCL is incurring losses in FY 2012-13, 2013-14 and also 2014-15. Therefore, we have to see the pattern of the relevant health of the comparable companies before it is selected for comparison. In this case, it may be functionally comparable but this company has failed in the selection criteria of persistent loss. Therefore, we are inclined to reject the submissions of the assessee and accordingly dismissed the ground raised by the assessee. Exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics - We observe that the assessee is exclusively engaged in the manufacturing, trading of mobile phones. The functions in manufacturing, pricing, branding etc are unique to the mobile phones and its accessories. It cannot be generalized with any of the home appliances or kitchen appliances. The comparables selected are Whirlpool and Penguin, which basically deals in various home as well as kitchen appliances, the products are many kind and distinct to the assessee company. These can never the proper comparables to the present assessee. Accordingly, we direct the AO/TPO to delete the above said comparables from the final comparables. Accordingly, the grounds raised by the assessee are allowed in this regard. Comparables selected for CSD segment - Infobeans Technologies - As quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Persistant Systems - The said concern was engaged in both product and development of software development services and hence, needs to be excluded from the final set of comparables. Larsen and Toubro Infotech - In view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be excluded from the financial set of the comparables. Mindtree Ltd - In view of functional dissimilarity as well as the difference in the assets owned by the company vis- -vis the assessee, we direct the Learned AO/TPO to exclude the company from the set of the final comparables. Additional ground on refund of excess dividend distribution tax paid u/s 115O - As decided in Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder (s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec.115-O of the Act, such additional income tax payable by the domestic company shall beat the rate mentioned in Section115O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to at axtreaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Appeal filed by the assessee is partly allowed.
Issues Involved:
1. Violation of principles of natural justice. 2. Jurisdictional error in reference under section 92CA(1). 3. Errors in determining Arm's Length Price (ALP) for international transactions. 4. Treatment of foreign exchange gain as non-operating income. 5. Selection and rejection of comparable companies for Transfer Pricing. 6. Risk adjustments in Transfer Pricing. 7. Levy of interest under sections 234A and 234B. 8. Refund of excess Dividend Distribution Tax (DDT). Detailed Analysis: 1. Violation of Principles of Natural Justice: The assessee contended that the final assessment order was vitiated as it violated principles of natural justice and was arbitrary. The Tribunal did not find merit in this contention and did not adjudicate it further. 2. Jurisdictional Error in Reference under Section 92CA(1): The assessee claimed that the reference made by the AO to the TPO under section 92CA(1) was without recording any reasons or material basis. The Tribunal did not specifically address this issue in detail, implying no substantial merit in the argument. 3. Errors in Determining ALP for International Transactions: The assessee argued that the TPO did not discharge the statutory onus to establish conditions specified in section 92C(3) before disregarding the ALP determined by the assessee. The Tribunal upheld the TPO's determination of ALP, finding no jurisdictional error or procedural lapses. 4. Treatment of Foreign Exchange Gain as Non-Operating Income: The Tribunal upheld the treatment of foreign exchange gain as non-operating income, emphasizing that the foreign exchange risk was borne by the AE and not the assessee. The Tribunal referred to the Safe Harbour Rules and ICAI guidelines, which exclude foreign exchange gains from operating revenue. The Tribunal also distinguished the case from other judicial precedents by noting the specific risk profile of the assessee. 5. Selection and Rejection of Comparable Companies for Transfer Pricing: - Zenith Computers Limited: The Tribunal upheld the rejection of Zenith Computers as a comparable, noting its persistent losses over three years. - Whirlpool of India Limited and Penguin Electronics Limited: The Tribunal directed the AO/TPO to exclude these companies from the final comparables, noting their functional dissimilarity and involvement in diverse products unrelated to the assessee's business. - Infobeans Technologies Limited, Persistent Systems Limited, Larsen & Toubro Infotech Limited, and Mindtree Limited: The Tribunal directed the exclusion of these companies from the comparables for the CSD segment, citing functional dissimilarities, lack of segmental data, and involvement in significant R&D and intangibles. 6. Risk Adjustments in Transfer Pricing: The Tribunal acknowledged the assessee's claim for risk adjustment, noting that the assessee, as a limited risk-bearing contract manufacturer, did not undertake significant market, product liability, credit, and collection risks. However, the Tribunal did not provide specific relief on this ground, focusing instead on the comparability analysis. 7. Levy of Interest under Sections 234A and 234B: The Tribunal did not specifically address the issue of interest levy under sections 234A and 234B, implying no substantial merit in the assessee's contention. 8. Refund of Excess Dividend Distribution Tax (DDT): The Tribunal dismissed the additional grounds regarding the refund of excess DDT, following the decision of the Special Bench in DCIT vs. Total Oil India Pvt. Ltd., which held that DDT is not subject to DTAA provisions unless specifically provided. Conclusion: The appeal was partly allowed, with the Tribunal directing the exclusion of certain comparables and upholding the treatment of foreign exchange gains as non-operating income. The Tribunal dismissed the additional grounds regarding the refund of excess DDT.
|
