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2015 (12) TMI 516 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - RITES Ltd., Apitco Ltd. and Kitco Ltd be excluded from the list of comoarable as not comparable to the functions performed by different service segments of assessee - Decided in favour of assessee. Exclusion of foreign exchange gains/ loss and provision for bad debts, by calculating the PLI, treating the same as non-operating item by TPO - Held that - We find considerable force in the submission of ld. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue account. This issue is squarely covered by the decision of the Hon ble Supreme Court in the case of Woodward Governor s (2009 (4) TMI 4 - SUPREME COURT ), wherein it has been held that forex gain/ loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. - Decided in favour of assessee.
Issues Involved:
1. Addition on account of Arm's Length Price (ALP) under section 92CA(3) of the Income-tax Act. 2. Legality of the assessment order. 3. Errors in the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) findings. 4. Non-allowance of credit for prepaid taxes. 5. Initiation of penalty proceedings under section 271(1)(c). 6. Interest charged under sections 234B and 234C. Detailed Analysis: 1. Addition on Account of ALP: The primary issue was the addition of Rs. 3,71,14,107/- to the assessee's income based on the ALP determined by the TPO. The assessee contended that the TPO and DRP erred by: - Rejecting the assessee's comparables without cogent reasons. - Using erroneous filters and cherry-picking high-margin comparables. - Comparing the assessee's support services to high-end technical services, despite the assessee being a non-risk bearing entity. The TPO's determination of the Profit Level Indicator (PLI) at 20.98%, later adjusted to 22.70% by the DRP, was based on a set of comparables that included companies providing high-end technical services. The assessee argued that 90% of its services were non-technical support services, and thus, comparables should reflect this. The tribunal agreed with the assessee, directing the exclusion of RITES Ltd., Apitco Ltd., and Kitco Ltd. from the list of comparables, as they were not functionally similar to the assessee's non-risk bearing support services. 2. Legality of the Assessment Order: The assessee claimed that the assessment order was bad in law. However, this issue was not separately addressed in detail in the judgment, as the focus remained on the specifics of the ALP determination and the comparables used. 3. Errors in TPO and DRP Findings: The tribunal found several errors in the TPO and DRP's approach: - The TPO wrongly rejected the assessee's segmental details and failed to allocate costs correctly. - The tribunal emphasized the importance of selecting comparables based on functional similarity, especially considering the assessee's non-risk bearing nature. - The TPO's exclusion of foreign exchange gains/losses and provision for doubtful debts from operating income/cost was incorrect. The tribunal directed these to be treated as operating items, referencing the Supreme Court's decision in Woodward Governor and other tribunal decisions. 4. Non-Allowance of Credit for Prepaid Taxes: The tribunal did not provide a detailed analysis of this issue, as it was not pressed by the assessee during the proceedings. 5. Initiation of Penalty Proceedings: The tribunal noted that the initiation of penalty proceedings under section 271(1)(c) was premature and thus did not address it substantively. 6. Interest Charged Under Sections 234B and 234C: The assessee contended that interest under section 234B was wrongly computed for 65 months instead of 58 months. The tribunal directed the Assessing Officer (AO) to verify and recalculate the interest accordingly. Conclusion: The tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables and the correct treatment of foreign exchange gains/losses and provision for doubtful debts. The AO was instructed to verify the computation of interest under section 234B. The initiation of penalty proceedings was deemed premature.
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