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2018 (11) TMI 1169 - AT - Income TaxTPA - selection of comparable - functinal dissimilarity - Held that - Assessee is a company engaged in the business of rendering IT enabled services ( ITES) in the nature of data management services (i.e. data management services, data collection, organization, validation, analysis and filtering of accounts) and call center services to its overseas associated enterprise (AE) thus companies functionally dissimilar with that of assessee need to be deselected from final list. Also on the huge brand value and the huge asset base of intangible assets need to be rejected.
Issues Involved:
1. Inclusion of Foreign Exchange Fluctuation as Operating Income while determining Profit Level Indicator (PLI). 2. Grant of Working Capital Adjustment. 3. Dispute with Inclusion and Exclusion of the Comparables. Detailed Analysis of Judgment: 1. Inclusion of Foreign Exchange Fluctuation as Operating Income while determining Profit Level Indicator (PLI): The first issue addressed was whether foreign exchange gain received by the assessee during the year should be considered as part of the operating profit. The assessee included this gain as operating income, but the TPO rejected it, asserting it had no bearing on the transactions already undertaken. The DRP upheld the TPO's decision, relying on the Safe Harbour Rules issued on 18.9.2013, which excluded foreign exchange gain or loss from operating income. However, the tribunal held that the foreign exchange gain is part of the operating income as it is on account of the export of services. This decision was supported by the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd vs. CIT and Pr. CIT vs. Ameriprise India (P) Ltd. The tribunal directed the AO/TPO to consider the foreign exchange fluctuation gain as operating income for computing the PLI of the assessee. 2. Grant of Working Capital Adjustment: The second issue was the non-granting of working capital adjustment to the assessee. The TPO acknowledged in his order that the assessee was entitled to this adjustment but did not grant it in the final computation. The tribunal directed the TPO/AO to grant the working capital adjustment to the assessee in accordance with the law, as stated in the TPO's own order. 3. Dispute with Inclusion and Exclusion of the Comparables: The third issue involved the inclusion and exclusion of certain comparables in the transfer pricing analysis. - R Systems International Ltd.: The TPO excluded this company because it followed the calendar year instead of the financial year. The tribunal held that if the assessee provides reliable and authentic data for the relevant quarters to align with the financial year, R Systems International Ltd. should be included in the comparability analysis. - Accentia Technologies Ltd.: The TPO included this company despite the assessee's objection that it was functionally dissimilar and involved in extraordinary activities like amalgamation. The tribunal found that the amalgamation did not impact the financial results for the relevant year and upheld its inclusion as a comparable. - E4e Healthcare: The assessee did not object to this comparable before the TPO or DRP and did not provide financial accounts for it. The tribunal found no reason to exclude E4e Healthcare as a comparable. - TCS e-Serve Ltd. and TCS e-Serve International Ltd.: These companies were included by the TPO, but the tribunal found them not functionally comparable due to their engagement in IT-enabled services, BPO services, and technical services, along with their substantial revenue and brand value. The tribunal directed their exclusion. - Infosys BPO Ltd.: The assessee initially included this company in its Transfer Pricing Study Report but later objected to its inclusion. The tribunal found Infosys BPO Ltd. not comparable due to its diverse business activities, significant goodwill, and brand value, and directed its exclusion. Conclusion: The tribunal partly allowed the appeal, directing the AO/TPO to include foreign exchange fluctuation gain as operating income, grant working capital adjustment, and reconsider the inclusion and exclusion of certain comparables based on the provided guidelines. The order was pronounced on 22-11-2018.
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