2021 (3) TMI 311 - AT - Income Tax

TP Adjustment - comparable selection - Exclusion of two comparable companies viz., M/s Infosys BPO Ltd and M/s TCS E-Serve Limited - HELD THAT - Companies having high brand value cannot be considered as comparable companies can be conveniently applied to the year under consideration also. We have also noticed that M/s Infosys BPO Ltd is being consistently excluded in the assessee s own case in the earlier years. M/s TCS E-serve Ltd has been excluded, inter alia, for the reason that it is providing KPO services and further it is explicitly stated that it is an integral part of Tata Consultancy Services strategy to build on its Full Service offerings that offer global customers an integrated portfolio of services ranting from IT services to BPO services - Assessee herein is undertaking backend processing of accounting and other transactions, back office operations, customer support services to various Associated Enterprises. Hence they are in the nature of BPO services only, while M/s Infosys BPO Ltd and M/s TCS E serve Ltd are providing variety of other services. Besides both the above said companies are supported by their parent companies, having huge brand value. Accordingly, we hold that both the above said companies cannot be considered as comparable companies. Accordingly, we direct the AO/TPO to exclude both M/s Infosys BPO Ltd and M/s TCS E serve Ltd from final list of comparables. Treatment of foreign exchange gain/loss as operating income/expenses or not - HELD THAT - As relying on M/s Arctern Consulting Pvt Ltd 2019 (10) TMI 1286 - ITAT BANGALORE has taken the view that the foreign exchange fluctuation gain/loss is operating in nature. Accordingly, following the same, we hold that that foreign exchange fluction gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee as well as of the comparable companies. ALP of the transactions require to be determined afresh in the light of decisions rendered supra. Accordingly, we restore this matter to the file of the AO/TPO.

Summary

Issues Involved:
1. Exclusion of Comparable Companies (Infosys BPO Ltd and TCS E-Serve Limited).
2. Treatment of Foreign Exchange Gain/Loss as Operating Income/Expenses.

Issue-wise Detailed Analysis:

1. Exclusion of Comparable Companies (Infosys BPO Ltd and TCS E-Serve Limited):

The assessee challenged the inclusion of Infosys BPO Ltd and TCS E-Serve Limited as comparable companies in the transfer pricing study. The assessee argued that these companies are functionally different, possess significant brand value, and have undergone extraordinary events affecting their financials.

- Infosys BPO Ltd: The assessee highlighted that Infosys BPO Ltd provides integrated IT and business process outsourcing solutions, consultancy, management, and strategic transformation services, and caters to diverse business segments. It has delivery centers in multiple countries and earns 'on-site' revenues. The company also owns intellectual property rights (IPR) and incurs significant advertisement and marketing expenses. An extraordinary event during the year, the acquisition of Portland Group Pty Ltd, further differentiates it from the assessee. The Tribunal noted that Infosys BPO Ltd has been consistently excluded in the assessee's own case in earlier years due to its high brand value and different functional profile.

- TCS E-Serve Limited: The assessee contended that TCS E-Serve Limited delivers core business processing services, analytics/insights (KPO), and support services for both data and voice processes. It offers an integrated portfolio of services ranging from IT to BPO services and is backed by Tata Consultancy Services (TCS) and Tata brand equity. The Tribunal observed that TCS E-Serve Ltd is engaged in KPO services and is an integral part of TCS's strategy to offer global customers an integrated portfolio of services. The Tribunal also noted that TCS E-Serve Ltd has been excluded in various decisions due to its high brand value and different functional profile.

The Tribunal concluded that both Infosys BPO Ltd and TCS E-Serve Ltd are not comparable to the assessee due to their high brand value, different functional profiles, and support from their parent companies. The Tribunal directed the AO/TPO to exclude these companies from the final list of comparables.

2. Treatment of Foreign Exchange Gain/Loss as Operating Income/Expenses:

The assessee argued that foreign exchange fluctuation gain/loss should be treated as operating income/expenses while computing the profit margin. The Tribunal referred to the decision in the case of M/s Arctern Consulting Pvt Ltd, which held that foreign exchange gain/loss should be considered as part of the operating profit. The Tribunal noted that the nature of the transaction is more relevant than the stand taken by the assessee in the preceding year. The Tribunal concluded that foreign exchange fluctuation gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee and comparable companies.

Conclusion:

The Tribunal directed the AO/TPO to re-determine the Arm's Length Price (ALP) of the transactions after excluding Infosys BPO Ltd and TCS E-Serve Ltd from the list of comparables and treating foreign exchange fluctuation gain/loss as operating income/expenses. The appeal of the assessee was treated as allowed.