2022 (8) TMI 521 - AT - Income Tax

TP Adjustment - inclusion/exclusion of certain comparables in/from the list of comparables - HELD THAT - Insync Analytics India Pvt. Ltd - RPTs of this company are more than 50% in the current year and about 100% in the preceding two years. The company is albeit functionally comparable but has controlled transactions. The TPO has set out certain filters to be applied on page 4 of his order. One of the filters is that the companies with RPTs of less than 25% are selected. Since this company is failing the RPT filter applied by the TPO himself, which is otherwise also well recognized and approved by various Hon'ble High Courts, we hold that this company cannot be included in the list of comparables because of breaching the filter. We, therefore, direct to exclude it. CES limited - It is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables. Domex e-data Pvt. Ltd - From the portion of the Directors' report, it is graphically clear that, apart from rendering IT enabled services, this company is also engaged in providing software development services. Though its revenue has been shown in a combined manner under one head of IT enabled services, but the above description of the activities makes it clear that it is also engaged in software development. As the assessee is engaged only in IT enabled services and not in software development, we order to exclude it from the list of comparables. Treatment of Foreign Exchange Fluctuation (forex) loss as non-operating - HELD THAT - It is undisputed even from the DRP directions that the forex gain pertains to business revenue of the assessee company. It has been held in several decisions rendered by the various courts of the country including in Pr. CIT Vs. BC Management Services Pvt. Ltd. 2017 (12) TMI 255 - DELHI HIGH COURT that foreign exchange gain or loss should be considered as operating in determining the operating margin. In view of the above precedent, we hold that the forex gain should be treated as an item of operating revenue. This ground, is therefore, allowed.

Summary

Issues:
1. Time-barred appeal due to the Covid pandemic situation.
2. Transfer pricing adjustment of Rs. 29,47,928.
3. Inclusion/exclusion of certain comparables in the list.
4. Treatment of Foreign Exchange Fluctuation (forex) loss as non-operating.

Time-barred appeal due to the Covid pandemic situation:
The appeal by the assessee was time-barred by 85 days, citing the Covid pandemic as the reason for the delay. The Tribunal condoned the delay, referring to the Supreme Court's suo motu cognizance of the challenges faced by litigants due to the pandemic and extended the time limit for filing appeals. The appeal was admitted for disposal on merits.

Transfer pricing adjustment of Rs. 29,47,928:
The only issue raised in the appeal was against the transfer pricing adjustment made by the Assessing Officer (AO). The assessee, engaged in providing IT-enabled services, reported an international transaction worth Rs. 16,85,41,378. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) and proposed a transfer pricing adjustment of Rs. 29,47,928. The Dispute Resolution Panel upheld the adjustment, leading to the impugned order.

Inclusion/exclusion of certain comparables in the list:
The Tribunal examined the comparability of the challenged companies. Regarding Insync Analytics India Pvt. Ltd., the Tribunal excluded it from the list of comparables due to breaching the Related Party Transactions (RPT) filter set by the TPO. CES Limited was also removed from the list as it provided both Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) services, unlike the assessee engaged only in BPO services. Domex e-data Pvt. Ltd. was excluded as it was engaged in software development in addition to IT-enabled services, unlike the assessee. The Tribunal directed the AO/TPO to re-determine the ALP considering these exclusions.

Treatment of Foreign Exchange Fluctuation (forex) loss as non-operating:
The assessee challenged the treatment of forex loss as non-operating, which was upheld by the TPO and DRP. The Tribunal held that forex gain should be considered as operating revenue based on precedents, including decisions by various courts. Consequently, the ground was allowed, and the impugned order was set aside, remitting the matter for re-determination of the ALP.

In conclusion, the Tribunal allowed the appeal for statistical purposes, setting aside the impugned order and remitting the matter to the AO/TPO for re-determining the ALP of the international transaction in light of the adjudication on the inclusion/exclusion of certain companies and the treatment of forex gain as operating revenue.