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2015 (10) TMI 1085 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - Aftek Infosys Ltd. - TPO had included this company on account of it dealing in software activity after pointing out that assessee had not been able to establish how the company was functionally different. Thus, it is evident that the functional differences, as pointed out by ld. counsel for the assessee in synopsis, have not been critically examined with reference to the annual report and, therefore, we restore this matter to the file of AO to find out the factual aspects on this count and, if, the company is found to be only a software product company, then the same cannot be compared with the assessee company, which is primarily a designing and developing software on contract basis for its AE. This issue is allowed for statistical purposes. Infosys Technologies Ltd. - because of the diversified functions performed by Infosys Technologies Ltd., and also on account of ownership of branded/ proprietary products, it cannot be compared with the assessee because difference in functions performed, asset base and risk assumed by both the companies. Satyam Computers Services Ltd.- we are in agreement with ld. counsel for the assessee that due to unreliable financial data of Satyam Computers Services Ltd., which is in public domain now, the company cannot be considered as a comparable to the assessee Xansa India Ltd.- no plea was taken before ld. CIT(A) on the basis of RPT, but now this objection has been taken as annual report is available and, therefore, the matter may be restored back to the file of ld. CIT(A) in order to arrive at proper conclusion. Geodesic Information Systems Ltd. - assessee has pointed out that this company as engaged in development of software products and operated as full fledged risk taking entrepreneur having IPR and trade mark. These aspects were not considered by ld. TPO, thus the issues raised before us needs to be examined by ld. TPO because assessee itself had taken into consideration this comparable. Ecosoft Technologies Ltd. - this company was rejected since data for current year was not available. As now the current year s data is available, so matter may be restored back to the file of ld. CIT(A). Compudyne Winfosystems Ltd -CIT(A) has not considered the segmental results of the software development unit. The assessee has filed the annual report of this comparable for FY 2002-03 in the paper book, wherein we find that in the entertainment division and analysis specific segmental details regarding software development, revenue earning and segment-wise results have been given. Therefore, the observation of ld. CIT(A) is not correct. We, accordingly, restore this issue to the file of AO for fresh adjudication Orient Information Technology Ltd. -the financial details as mentioned in the TPO s order are available in the annual report filed by assessee and, therefore, the matter needs to be examined afresh by ld. CIT(A). Accordingly, we set aside this issue to the file of CIT(A) for decision afresh. Adjustment on account of risk environment - CIT(A) held that TPO had committed an error by allowing downward adjustment of 20% in an ad hoc fashion - Held that - No interference is called for in the order of ld. CIT(A) on this count because assessee failed to propose the necessary adjustment by filing a scientific methodology during TP proceedings or during appellate proceedings. The onus for quantification was on assessee on the risk assumed by comparables vis a vis tested party. Accordingly, this ground is rejected. Exemption u/s 10A - Held that - t it is not disputed that PR, supply chain, CT head and SMG were incidental services to IT enabled services and, therefore in view of Notification no. 890(E) dated 26-9-2000, these services being part of back office operation and support services are eligible to be considered as part of export turnover. In the result, this ground is allowed. Disallowance of leave encashment - Held that - In view of clause (f) of section 43B, assessee s claim will be disallowed as the same had actually not been paid by the assessee. The assessee had merely made a provision for payment of leave encashment. - Decided against assessee. Disallowance of foreign exchange fluctuation loss - Held that - In case of the revenue items falling under section 37(1), para 9 of AS-11, which deals with recognition of exchange differences, needs to be considered. Under this para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-avis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period. See CIT Vs. Woodward Governor India (P) Ltd. 2009 (4) TMI 4 - SUPREME COURT - Decided in favour of assessee.
Issues Involved:
1. Validity of the reference made by the AO to the TPO under section 92CA(3). 2. Adjustment to the arm's length price (ALP) for software services and other services. 3. Rejection and inclusion of comparables in the Transfer Pricing (TP) analysis. 4. Denial of the benefit of +/-5% mentioned in the proviso to section 92C(2). 5. Reduction of deduction claimed under section 10A. 6. Disallowance of accrued liability on account of leave encashment under section 43B(f). 7. Disallowance of foreign exchange fluctuation loss. Detailed Analysis: 1. Validity of Reference to TPO: The assessee contended that the reference made by the AO to the TPO under section 92CA(3) was invalid as the AO did not record any reasons. However, this issue was not pressed during the hearing and was therefore rejected. 2. Adjustment to ALP: The primary dispute revolved around the adjustment of Rs. 11,00,92,376 to the ALP for software services provided to associated enterprises (AEs). The CIT(A) confirmed this adjustment, rejecting the TNMM analysis by the assessee and using data not available at the time of documentation. The CIT(A) also rejected certain comparables selected by the assessee and included others, leading to the final adjustment. The assessee's appeal on this ground was partly allowed for statistical purposes, with certain issues remanded back to the AO/TPO for fresh examination. 3. Rejection and Inclusion of Comparables: The CIT(A) and TPO had disagreements over the comparability of various companies. Key points included: - Aftek Infosys Ltd.: The matter was remanded to the AO to verify if the company was only a software product company. - Infosys Technologies Ltd.: Excluded due to diversified functions and ownership of proprietary products. - Satyam Computers Services Ltd.: Excluded due to unreliable financial data. - Xansa India Ltd.: Remanded to CIT(A) for fresh decision based on RPT/Sales ratio. - Geodesic Information Systems Ltd.: Remanded to TPO for fresh examination. - Ecosoft Technologies Ltd., Compudyne Winfosystems Ltd., Orient Information Technology Ltd.: Remanded to CIT(A) for fresh examination with available current year data. 4. Denial of +/-5% Benefit: The CIT(A) upheld the denial of the +/-5% benefit mentioned in the proviso to section 92C(2) as the assessee did not propose any scientific methodology for risk adjustment. 5. Reduction of Deduction under Section 10A: The AO reduced the deduction claimed under section 10A from Rs. 12,60,73,272 to Rs. 12,56,84,892, excluding certain service receipts from the total turnover. The CIT(A) partly allowed the assessee's claim, including IT support services but excluding PR, supply chain, CT head, and SMG services. The Tribunal allowed the assessee's ground, holding that these services are part of back-office operations and support services. 6. Disallowance of Leave Encashment under Section 43B(f): The AO disallowed Rs. 53,08,491 representing accrued liability on account of leave encashment under section 43B(f). The CIT(A) upheld this disallowance, rejecting reliance on the Calcutta High Court decision in Exide Industries Ltd. v. UOI, as it was stayed by the Supreme Court. The Tribunal dismissed the assessee's ground, following the specific mandate of section 43B. 7. Disallowance of Foreign Exchange Fluctuation Loss: The AO disallowed Rs. 1,25,85,932 on account of foreign exchange fluctuation loss, considering it a notional loss. The CIT(A) allowed the assessee's claim, following the ITAT Special Bench decision in ONGC Ltd. and the Supreme Court decision in CIT v. Woodward Governor India (P) Ltd. The Tribunal upheld the CIT(A)'s decision, dismissing the department's appeal. Conclusion: The Tribunal's order resulted in partial relief for the assessee, with several issues remanded for fresh examination. The appeals for AY 2003-04 and 2004-05 were disposed of with directions for reassessment of certain comparables and adjustments. The department's appeals were dismissed, upholding the CIT(A)'s decisions on foreign exchange fluctuation loss and other adjustments.
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