2014 (5) TMI 475 - AT - Income Tax

Transfer pricing adjustments - Determination of ALP - Lack of jurisdiction - Statutory onus not discharged Held that - The legislature has provided sufficient safeguards to protect the interest of the assessee in this regard - assessee gets two opportunities to put forth its point of view before the finalization of the assessment order - there is no need to device and introduce one more protection in terms of the recording of detailed satisfaction by the AO before making reference to the TPO that the price charged/paid in an international transaction is not at ALP - the value of the assessee s international transactions standing at Rs.116 crore is far in excess of the threshold limit of Rs.5 crore given in the Instruction - which has been issued in the context of section 92CA - the case of the assessee is covered u/s 92CA and not section 92C. Relying upon SONY INDIA P. LTD. Versus CENTRAL BOARD OF DIRECT TAXES AND ANOTHER 2006 (10) TMI 88 - DELHI HIGH COURT - the prescribed procedure is to be presumed as having been rightly complied with by the concerned authority unless it is specifically and explicitly shown otherwise - Scrutiny in this regard can be undertaken by the appellate authorities only when the assessee adduces some evidence to indicate that there was a failure on the part of the authority to adhere to the prescribed procedure - No material worth the name has been brought on record by the assessee to demonstrate that the AO failed to form a prima facie view at the time of making a reference to the TPO Decided against Assessee. Rule of consistency Determination of ALP Held that - The mere fact that no Transfer Pricing Adjustment was made in the preceding year would simply mean that the profit shown by the assessee from its international transactions is equal to or more than the benchmarked profit - If the assessee has shown profit at Arm s Length Price in one year, which has been accepted as such, it does not necessarily mean that the assessee s profit from international transaction in the succeeding year is also better than that of the comparables - It is axiomatic that if profit from the assessee s international transactions in succeeding year is equal to or better than that of comparables after considering the cushion available, then there can be no question of making any transfer pricing adjustment notwithstanding the fact that the international transactions were scrutinized in terms of section 92 - there are several factors which affect the determination of the ALP, which may be present in one year but absent in the other year - It is too far to claim that the acceptance of international transaction at ALP in one year should preclude the authorities from the determination of ALP in a subsequent year Decided against Assessee. Exclusion of Foreign exchange fluctuation gain/loss Operating revenue/cost Held that - There was merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables - the nature of foreign exchange gain earned by the assessee is in relation to the revenue earned by the assessee from its AEs in connection with the provision of I.T Enabled data conversion services, which has been reported as international transaction. When the foreign exchange gain directly emanates from the consideration received for rendering of services to its A.E, it could not be appreciated as to how such foreign exchange gain fluctuation can be considered as an item of non-operating revenue - What is true for foreign exchange gain from the transactions of the revenue nature being considered as part of operating revenue is equally true for the foreign exchange loss being considered as part of operating costs from the transactions of the revenue nature - Relying upon SAP Labs India Pvt. Ltd. Vs ACIT 2010 (8) TMI 676 - ITAT, BANGALORE - foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue - the order is set aside and the matter is remitted back to the AO/TPO to re-compute the assessee s margin as well as that of the comparables by considering foreign exchange gain/loss as an item of operating revenue/cost Decided in favour of Assessee. Selection of comparables Coral Hub Ltd. Held that - Nothing has been brought on record to demonstrate that the related party transactions of VITL for the current year exceed the threshold limit of 25% - simply because a case has been held to be incomparable for one year cannot per se be considered as incomparable for the succeeding year - the Tribunal in a preceding year of the same assessee has held this case to be not comparable on the strength of filter of percentage of employees cost to total cost and the assessee passes the test of this filter for the instant year as well the exclusion of the company in the list of comparable is directed Decided in favour of Assessee.

Summary

Issues Involved:
1. Lack of Jurisdiction
2. Rule of Consistency
3. Foreign Exchange Fluctuation Gain/Loss
4. Inclusion of Coral Hub Ltd. in Comparables

Detailed Analysis:

I. Lack of Jurisdiction:

2.1. The first issue raised by the assessee is the non-discharging of the statutory onus by the Assessing Officer (AO) under clauses (a) to (d) of section 92C(3) of the Income-tax Act, 1961. The assessee argued that the AO failed to establish that the case fell under any of these clauses, which is a pre-condition for determining the Arm's Length Price (ALP) of international transactions. The AO's failure to form an opinion on these clauses vitiated the entire exercise of determining the ALP and the resultant transfer pricing addition.

2.2. The tribunal noted that section 92C(3) requires the AO to form an opinion based on material or information in his possession. However, section 92CA allows the AO to refer the computation of ALP to the Transfer Pricing Officer (TPO) with the previous approval of the Commissioner. Instruction No. 3 of 2003 mandates scrutiny and reference to the TPO if the aggregate value of international transactions exceeds Rs. 5 crore. The tribunal cited the Delhi High Court's judgment in Sony India (P) Ltd. vs. CBDT, which held that the AO needs only a prima facie opinion to make such a reference, not a detailed satisfaction.

2.3. The tribunal emphasized the safeguards provided by the legislature: the AO's reference to the TPO requires the Commissioner's approval, the TPO gives the assessee an opportunity to show cause, and the assessee can challenge the draft order before the Dispute Resolution Panel (DRP) and subsequently appeal to the tribunal. These safeguards negate the need for additional protection through detailed satisfaction by the AO.

2.4. The tribunal rejected the assessee's reliance on the Sony India case, noting that the requirements of section 147 (related to reopening assessments) cannot be applied to section 92. The assessee's case falls under section 92CA, not section 92C, and the Delhi High Court's judgment in Sony India is binding.

2.5. The tribunal dismissed the assessee's contention that the AO did not form an opinion before making the reference to the TPO, as there was no evidence to support this claim. The prescribed procedure is presumed to have been followed unless explicitly shown otherwise.

II. Rule of Consistency:

3.1. The assessee argued that no transfer pricing adjustment was required for the current year as the ALP for the preceding year was accepted by the authorities. The assessee cited the Supreme Court judgments in Radhasoami Satsang vs. CIT and CIT vs. Excel Industries Ltd. to emphasize the rule of consistency.

3.2. The tribunal acknowledged the rule of consistency but noted that it applies only if there is no change in the factual or legal position. The tribunal highlighted that the determination of ALP involves several factors that can change from year to year, such as profit margins and comparables. The tribunal rejected the assessee's contention, stating that the acceptance of ALP in one year does not preclude authorities from determining ALP in subsequent years.

III. Foreign Exchange Fluctuation Gain/Loss:

4.1. The assessee contested the exclusion of foreign exchange fluctuation gain/loss from operating revenue/cost by the TPO.

4.2. The tribunal noted that the assessee earned revenue from IT-enabled data conversion services and chose the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating profit to Total Cost. The TPO accepted TNMM but excluded foreign exchange fluctuation gain/loss from operating revenue/cost.

4.3. The tribunal found merit in the assessee's contention that foreign exchange fluctuation gain/loss should be included in operating revenue/cost, as it directly relates to the revenue earned from international transactions.

4.5. The tribunal cited the Special Bench of the Tribunal in ACIT vs. Prakash I. Shah, which held that foreign exchange fluctuation gain/loss from export is an integral part of export proceeds. The tribunal also referred to the Bangalore Bench in SAP Labs India Pvt. Ltd. vs. ACIT, which held that foreign exchange fluctuation gain is part of operating profit.

4.9. The tribunal set aside the impugned order and remitted the matter to the AO/TPO to recompute margins by considering foreign exchange fluctuation gain/loss as part of operating revenue/cost.

IV. Inclusion of Coral Hub Ltd.:

5.1. The assessee objected to the inclusion of Coral Hub Ltd. (formerly Vishal Information Technologies Ltd.) as a comparable, arguing that it had a different business model involving outsourcing activities and owning significant intangibles, with a minimal employee cost ratio.

5.2. The tribunal rejected the contention that Coral Hub Ltd. should be excluded based on the previous year's exclusion due to related party transactions exceeding 25%. The tribunal noted that the basis for exclusion in the preceding year was not applicable for the current year.

5.3. However, the tribunal found that Coral Hub Ltd. had a different business model with a significantly lower employee cost ratio compared to the assessee. The tribunal referred to its order in the assessee's own case for the assessment year 2007-08, where Coral Hub Ltd. was held to be incomparable due to its different business model.

5.5. The tribunal followed the principle of stare decisis and directed the exclusion of Coral Hub Ltd. from the list of comparables, as the facts and circumstances for the current year were similar to those of the assessment year 2007-08.

Conclusion:

The tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to recompute margins by including foreign exchange fluctuation gain/loss in operating revenue/cost and excluding Coral Hub Ltd. from the list of comparables. The tribunal dismissed the lack of jurisdiction and rule of consistency contentions raised by the assessee.