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2014 (3) TMI 626 - AT - Income TaxComputation of Arm s length price - Selection of comparables by TPO Accentia Technologies Ltd. Held that - The view of the DRP is upheld that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place - It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result - This fact has to be verified by the TPO - If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded. Mold Tek Technologies Ltd. - Eclerx Services Ltd. Held that - The DRP has rightly accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/de-merger - the assessee's contention is accepted that this company cannot be treated as comparable - the company has shown super normal profit working out to 113% - Relying upon Teva India (P.) Ltd. Versus Deputy Commissioner of Income-tax, Range 8(2), Mumbai 2011 (1) TMI 1210 - ITAT MUMBAI companies showing supernormal profit cannot be treated as comparable thus, this company cannot be treated as a comparable. Maple e-Solutions Ltd. & Tricom Corp Ltd. Held that - The decision in ITO v. CRM Services India (P) Ltd. Delhi 2011 (6) TMI 398 - ITAT DELHI followed - overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases - In view of a question mark on the reputation of the owner, it would be unsafe to take their results for comparison of the profitability of the assessee - these two companies cannot be accepted as comparables. HCL Comnet Systems & Services Limited, Infosys BPO Limited & Wipro Limited Held that - The TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend - That very logic also applies to the companies having high turnover of over ₹ 200 crores as against the assessee's turnover of only ₹ 60 crores, and therefore, it would be fair enough to exclude those companies also The decision in Agnity India Technologies (Formerly Genband Pvt. Ltd.) Versus Income-tax Officer, 2010 (11) TMI 852 - ITAT DELHI followed thus, the orders of the DRP as well as the assessment order passed under S.143(3) read with S.144C of the Act set aside the matter remitted back to the TPO for fresh examination of ALP Decided in favour of Assessee. Foreign exchange fluctuation gain/loss not considered Held that - The decision in Sap Labs India (P.) Ltd. v. Asstt. CIT 2010 (8) TMI 676 - ITAT, BANGALORE followed - The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business - foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee - The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company - even for the year under appeal also the same principle should be applied, and while computing the margin for determining the ALP for the assessment year under appeal, the foreign exchange gain/loss has to be taken as part of the operating margin the AO is directed to treat the foreign exchange fluctuation gain/loss as part of the operating margin of the comparable company Decided in favour of Assessee.
Issues Involved:
1. Selection of comparables for Transfer Pricing (TP) analysis. 2. Non-consideration of foreign exchange fluctuation gain/loss in determining Arm's Length Price (ALP). Detailed Analysis: 1. Selection of Comparables for Transfer Pricing (TP) Analysis: Accentia Technologies Ltd.: - The assessee argued that this company should not be considered as a comparable due to uncomparable financial results arising from an amalgamation in December 2006. The Dispute Resolution Panel (DRP) for the assessment year 2008-09 in the assessee's own case accepted that extraordinary events like merger and demerger impact the financial results. The Tribunal agreed with the DRP's view and directed the Transfer Pricing Officer (TPO) to verify the amalgamation facts. If verified, Accentia Technologies Ltd. should be excluded as a comparable. Mold Tek Technologies Ltd.: - The assessee objected to this company being considered as a comparable due to a merger from October 1, 2006, resulting in exceptional financial results. The DRP for the assessment year 2008-09 accepted the assessee's contention. Additionally, the Tribunal noted that the company showed supernormal profit at 113%, and companies with supernormal profits should not be considered as comparables, as held by the ITAT Mumbai in Teva India P. Ltd. v. DCIT. The Tribunal accepted the assessee's contention and excluded Mold Tek Technologies Ltd. as a comparable. Eclerx Services Ltd.: - The assessee objected on the grounds of supernormal profit (89%) and the nature of services being Knowledge Process Outsourcing (KPO), which is distinct from the assessee's services. The Tribunal accepted the assessee's contention and excluded Eclerx Services Ltd. as a comparable. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): - The assessee argued that this company outsources a significant portion of its ITES work to third-party vendors, making it functionally different. The DRP for the assessment year 2008-09 and the ITAT Mumbai in Maersk Global Service Centre India P. Ltd. accepted this contention. The Tribunal agreed and excluded Coral Hub Limited as a comparable. Maple e-Solutions Ltd. and Tricom Corp Ltd.: - The assessee objected to these companies being considered as comparables due to the directors' involvement in fraud, making the financials unreliable. The ITAT Delhi in ITO v. CRM Services India P. Ltd. held that financial results of these companies are unreliable. The Tribunal accepted the assessee's contention and excluded these companies as comparables. HCL Comnet Systems & Services Limited, Infosys BPO Limited, and Wipro Limited: - The assessee argued that these companies are industrial giants with substantially higher turnover compared to the assessee's turnover of Rs. 60 crores. The ITAT Delhi in Agnity India Technologies P. Ltd. and the ITAT Bangalore in Genesys Integrating System (India) P. Ltd. held that companies with high turnover should not be considered as comparables. The Tribunal accepted the assessee's contention and excluded these companies as comparables, applying a turnover filter of Rs. 1 crore to Rs. 200 crores. The Tribunal concluded that companies with extraordinary circumstances, supernormal profits, functional dissimilarity, outsourcing activities, unreliable financials due to fraud, and substantially high turnover should not be considered as comparables. The matter was remanded to the TPO to determine the ALP afresh in light of these observations. 2. Non-Consideration of Foreign Exchange Fluctuation Gain/Loss: - The TPO excluded foreign exchange fluctuation gain/loss while determining the ALP, which was confirmed by the DRP. The assessee contended that foreign exchange fluctuation gain/loss should be included as it arises in the normal course of business. The Tribunal referred to the Bangalore Bench decision in SAP Labs India P. Ltd. and the Hyderabad Bench decision in Four Soft Ltd., which held that foreign exchange fluctuation gain/loss should be considered as part of the operating margin. The Tribunal directed the Assessing Officer to treat foreign exchange fluctuation gain/loss as part of the operating margin for determining the ALP. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, setting aside the orders of the DRP and the assessment order, and remanded the matter to the TPO for fresh determination of the ALP, considering the Tribunal's observations. The Tribunal also directed the inclusion of foreign exchange fluctuation gain/loss in the operating margin calculation.
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