2015 (11) TMI 635 - AT - Income Tax

Transfer pricing adjustment - CIT(A) excluded M/s. Synergy Log-in Systems Ltd and M/s. Transworld Infotech Ltd from the list of comparables selected by TPO for bench marking the value of international transactions of assessee with its AE - Held that - Unless and until there are reliable published accounting records, which would help to cull out the result of a comparable company for a financial year comparable to that of the tested party any attempted comparison would not yield correct results. In our opinion the CIT (A) was justified in directing exclusion of M/s. Synergy Log-in Systems Ltd and M/s. Transworld Infotech Ltd, since their accounting year ended on a different date, when compared to that of the assessee. - Decided against revenue. Foreign exchange loss / gain held as operating in nature by CIT(A) - Held that - Considering the nature of activities of assessee and the nature of revenues earned by it from software development activities rendered abroad, we are of the opinion that the foreign exchange gain could have been construed only as incidental to the sales, payment to suppliers etc., We cannot therefore find any fault with the direction of the CIT (A) to consider such foreign exchange gain as operating in nature.- Decided against revenue. Reworking of the operating margin by allocating cost on the basis of man-hours as directed by CIT(A) - Held that - There is no dispute that assessee was billing its AE on cost plus basis. Such cost was arrived at by the assessee by allocating the indirect cost on the basis of manhours and direct cost directly. When the revenue of the assessee itself was based on an allocation done on man-hour basis, in our opinion, it was not appropriate to adopt a different yardstick for working out its PLI. That for a software development company, the most appropriate method for allocating indirect cost is head-count method has been clearly brought out by Hon ble Delhi High Court judgment in the case of EHPT India P. Ltd 2011 (12) TMI 49 - DELHI HIGH COURT - Direction of CIT (A) that apportionment of cost has to be done on man-hour basis and not on turnover basis could not be faulted with. We do not find any reason to interfere with the direction of CIT (A) in this regard. - Decided against revenue.

Summary

Issues:
1. Exclusion of certain companies from comparables list for benchmarking international transactions.
2. Treatment of foreign exchange loss/gain.
3. Allocation of indirect costs based on man-hours.

Analysis:

1. The first issue pertains to the exclusion of M/s. Synergy Log-in Systems Ltd and M/s. Transworld Infotech Ltd from the list of comparables for benchmarking international transactions. The Tribunal upheld the CIT (A)'s decision to exclude these companies due to their financial year not coinciding with that of the assessee. The Tribunal emphasized the importance of comparing transactions with uncontrolled transactions and ruled that without reliable accounting records for a comparable financial year, correct results cannot be obtained. Therefore, the exclusion was deemed justified, and the Revenue's grounds were dismissed.

2. The second issue involves the treatment of foreign exchange loss/gain as operating in nature. The Revenue contended that the CIT (A) did not establish a nexus between the foreign exchange loss/gain and the export activity of the assessee. However, the Tribunal supported the CIT (A)'s decision, considering the nature of the activities and revenues of the assessee. The Tribunal found the foreign exchange gain to be incidental to sales and payment activities, aligning with operating nature. Thus, the Revenue's grievance was dismissed.

3. The final issue concerns the allocation of indirect costs based on man-hours. The Tribunal addressed the dispute between the assessee's method of allocation and the Revenue's preference for turnover ratio allocation. The Tribunal sided with the assessee, highlighting the critical role of manpower in the company's operations and the consistency of the method with past practices and judicial precedents. The Tribunal concluded that the CIT (A)'s direction to allocate costs based on man-hours was appropriate, considering the nature of the business. As a result, the Revenue's grounds were dismissed, and the cross objection of the assessee was also dismissed, leading to the dismissal of both the appeal and cross objection.

This detailed analysis of the judgment from the Appellate Tribunal ITAT Bangalore showcases the intricate legal reasoning and application of transfer pricing principles in resolving the issues raised by the Revenue and the assessee.