2025 (3) TMI 1420 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Exclusion of Cosmic Global from the final list of comparables company earns overseas revenue only from medical transcription translation and consultancy services. Hence it is clear that revenue from BPO is only from domestic operations. Thus Cosmic s export revenue from BPO services is 0% therefore fails Ld. TPO s own filter of having at least 75% export sales. In fact Cosmic was rejected by the co-ordinate bench in assessee s own case for AY 2009-10 2023 (2) TMI 1103 - ITAT DELHI on the ground that it fails export filter of 75% and hence cannot be considered. Eclerx Services excluded on the ground of functional dissimilarity. TCS e-Serve company is functionally comparable. We therefore direct the Assessing Officer to include this company in the set of comparables. Recomputing the profit level indicator of the assessee by erroneously considering foreign exchange gain/loss as a non-operating item even though the same has been considered as operating in prior assessment years - We are of the considered view that considering the business profile of the assessee this contention raised on behalf of the assessee about inclusion of foreign exchange gains in operating revenue finds merit. We are inclined to agree with the assessee that the foreign exchange gain earned by the assessee is in relation to the revenue earned from its AE in connection with provision of ITES. We find that foreign exchange gain directly results from consideration received from rendering ITES to AE and therefore we fail to understand how such foreign exchange fluctuation gain should be considered as non-operating. Thus we allow this ground of appeal raised by the assessee and direct the Assessing Officer/TPO to treat the forex gains as operating income of the assessee. Ground No. 5 is allowed. Computation of working capital adjusted margins of comparable companies - We find that the CIT(A) even directed TPO to consider the correct working capital adjusted margins but this was not done by the TPO in the appeal effect order. We accordingly direct the Assessing Officer/TPO to examine and consider the correct margins of Interglobe in the case of the assessee. Ground No. 6 is allowed for statistical purposes. Inclusion of comparables rejected by the TPO viz. Axis-IT T Ltd. ICRA Online - ICRA passes the export earnings filter of 75%. The earnings from outsourced services fees segment as on March 31 2010 is Rs. 128, 046, 000 and the export earnings are Rs. 111, 409, 000 which are almost 87% of the total revenue from the BPO services. Therefore ICRA should be retained as a suitable comparable. This Ground No. 2 is dismissed. Motif India Infotech - Annual report of the company is available. The TPO has not put forward any other argument for the rejection of this comparable. Accordingly Motif India Infotech Pvt Ltd should be considered for the purposes of TP analysis. Therefore we are of the considered opinion that the ld. CIT(A) rightly directed inclusion of Motif India Infotech Pvt. Ltd.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment revolve around the determination of the arm's length price (ALP) for the assessee's international transactions with its associated enterprises (AEs) under the Transfer Pricing (TP) regulations. The key issues include:

• Whether the inclusion or exclusion of certain comparable companies by the Transfer Pricing Officer (TPO) and the Commissioner of Income Tax (Appeals) [CIT(A)] was appropriate.
• Whether the foreign exchange gains should be considered as operating income for the purpose of computing the profit level indicator (PLI).
• Whether the working capital adjustments were correctly computed by the TPO.
• Whether the CIT(A) erred in rejecting or including certain comparables based on export filter criteria and availability of annual reports.

2. ISSUE-WISE DETAILED ANALYSIS

Inclusion/Exclusion of Comparable Companies:

• Cosmic Global Ltd: The assessee argued for the exclusion of Cosmic Global Ltd from the list of comparables due to its failure to meet the TPO's filters for revenue from BPO services and export sales. The Tribunal agreed with the assessee, citing precedents where Cosmic Global was excluded due to similar reasons.
• Eclerx Services Ltd: The Tribunal found that Eclerx, being a KPO service provider, was not functionally comparable to the assessee, which was a BPO service provider. The Tribunal directed the exclusion of Eclerx from the list of comparables.
• TCS e-Serve Ltd: The Tribunal agreed with the assessee's contention that TCS e-Serve was not comparable due to its brand value and lack of segmental data, directing its exclusion from the comparables.
• Omega Healthcare Management Services Pvt Ltd: The Tribunal found Omega to be functionally comparable and directed its inclusion in the list of comparables.

Foreign Exchange Gains as Operating Income:

• The Tribunal held that foreign exchange gains should be considered as operating income, as they are directly linked to the assessee's core business operations. The Tribunal noted that the Safe Harbour Rules, which treat forex gains as non-operating, were not applicable for the assessment year in question.

Working Capital Adjustments:

• The Tribunal directed the TPO to correct the working capital adjusted margins for Interglobe, as the CIT(A) had previously instructed but was not implemented by the TPO.

Revenue Appeal:

• The Revenue's appeal against the inclusion of Axis-IT & T Ltd., ICRA Online Ltd., and Motif India Infotech Pvt Ltd was dismissed. The Tribunal found that these companies met the necessary filters and were functionally comparable to the assessee.

3. SIGNIFICANT HOLDINGS

• The Tribunal established that foreign exchange gains directly related to the core business operations should be considered as operating income for transfer pricing purposes.
• The Tribunal reinforced the principle that comparables must meet functional similarity and applicable filters, such as export revenue thresholds, to be included in TP analysis.
• The Tribunal emphasized the need for accurate computation of working capital adjustments and directed corrections where necessary.
• The Tribunal's decision to exclude or include certain comparables was based on detailed functional analysis and adherence to established filters and precedents.