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TMI Blog2015 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... TENT SYSTEMS LTD should not be regarded as a comparable as relying on Agnity Technologies case [2010 (11) TMI 852 - ITAT DELHI] Treatment of foreign exchange fluctuation gain/loss as operating item - Held that:- As relying on Westfalia Separator India Pvt. Ltd. vs. ACIT [2015 (3) TMI 140 - ITAT DELHI] the forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. When we read the ratio of the case of Sutlej Cotton (1978 (9) TMI 1 - SUPREME Court) in juxtaposition to that of the Special Bench in case of Prakash I Shah (2008 (8) TMI 387 - ITAT BOMBAY-K ), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case and in law, the AO erred in making a reference to the TPO under Section 92CA of the Act without recording reasons on the basis which the AO considered it necessary or expedient to refer the international transaction entered into by the Appellant with its associated enterprise ( AE ). 4. That on facts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm s length price in respect of international transaction entered into by the Appellant with its Associated Enterprise ( AE ) using the most appropriate method (i.e. the transactional net margin method), maintained all the information and documentation required under section 92D of the Act, used information/data available in the database (Prowess database and Capitaline database) at the time of filing the income tax return on a bonafide belief that the data in the database is reliable and correct and furnish the Transfer Pricing Study ( TP Study ). 5. That the AO and DRP erred in confirming the action of the TPO impliedly rejecting the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company was not available in the public domain. 10. That the AO and DRP erred in confirming the action of the TPO in selecting Persistent Systems Ltd. as a comparable for benchmarking the international transaction entered into by the Appellant with its AE without appreciating that the company had RPT of more than 15% of the total operating income. 11. That the DRP erred in confirming the action of the TPO in treating foreign exchange gain/loss and hedging costs/premium as a non-operating income/expense. 12. That the AO and DRP erred in confirming the action of the TPO in not allowing risk adjustment claimed by Appellant in terms of Rule 10B(1)(e) read with Rule 10B(3) of the Income tax Rules, 1962. 13. That the TPO and the DRP erred in proposing an adjustment to the arm s length price computed by the Appellant without appreciating that since the Appellant was eligible to claim deduction under Section 10A of the Act in respect of income from the international transaction entered into between the Appellant and its AE, there was no motive to shift profits outside India by manipulating the prices charged in international transactions, which is pre-requisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within +/= 5% range of the mean margin of the comparables, no transfer pricing adjustment was offered in the return of income. The results as submitted by the tax payer can be summarized as under: Particulars Software Operating revenues 230,36,63,123 Operating expenses 200,94,04,644 Operating profit 29,42,58,479 OP/TC 14.64% Method used TNMM PLI OP/TC No of comparables 12 Mean of Margin of comparables (Adjusted) 12.13% 6 The TPO vide an order dated 10.1.2014 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparable selected by the assessee. Thereafter the TPO selected a list of 13 comparables and proposed an adjustment of ₹ 28,59,06,323/- by computing the mean Profit Level Indicator (PLI) of the comparable companies at 25.94% as against PLI of 14.64% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 105% of International Transaction 235,66,23,507 Adjustment u/s 92CA 15,69,19,599 8 During the course of hearing, the learned counsel for the assessee submitted that all his contentions vis- -vis grounds raised in the memo of appeal be confined to the exclusion of the following comparables from the list which was finally selected by the DRP: a) E-Infochips Bangalore Ltd. b) Infosys Ltd. c) Persistent Systems Ltd.; and treatment of foreign exchange fluctuation gain/loss as operating item 9 We have considered the rival submissions and perused the material on record. Taking up the each of the comparables contested and disputed by the appellant in this appeal. E-INFOCHIPS BANGALORE LTD. 10. The DRP repelled the objection of the assessee as under: The taxpayer primarily wants this comparable to be excluded on account of Function not comparable Shift of focus from software services From the perusal of annual report it is seen that under software services the main activities are product lifecycle management, application development and Integration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. The limited contention raised by the learned counsel for the assessee is that the entity M/s. E-Infochips Bangalore Ltd. taken by the Assessing Officer/TPO as comparable should be excluded from the list of final comparables for the purposes of transfer pricing analysis on the ground of functional differences as well as on the ground of insufficient information available in respect of the said entity in public domain. In order to support and substantiate his contention of functional dissimilarity, the learned counsel for the assessee has heavily relied on the contents of the website www.einfochip.com., the print out of relevant portion of which is placed on record before us. On the basis of the said contents, he has made an attempt to point out that M/s. E-Infochips Bangalore Ltd. is functionally different form the assessee company in as much as the said company is mainly into development of new products whereas the assessee company is mainly providing software development services. After having gone through the website www.einfochip.com., we however find that the same is in respect of the entire group of e-Infochips, of which M/s. E-Infochips Bangalore Ltd. is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tential comparable earning higher profit satisfies the comparability condition. Since this exercise has not been done either by the AO/TPO or the DRP in the present case, we are of the view that the matter should go back to the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also take care of the grievance of the assessee relating to the lack of sufficient information in respect of M/s. E-Infochips Bangalore Ltd. available in the public domain in as much as the TPO can obtain such information in the form of relevant schedules of the Profit Loss Account of the said entity as well as the segmental details, if any, directly from the said entity. We therefore, set aside the impugned order of the Assessing Officer as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee proper and sufficient opportunity of being heard. Ground No.2 of the assessee's appeal is accordingly allowed for statistical purposes.. 10.5 Having regard to the above decision we also set-aside the orders of TPO/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Turnover of ₹ 21,140 crores vs. ₹ 230.36 crores Significant intangibles of more than ₹ 1 lac crores vs. NIL Onsite (48.7) and offshore (51.3) vs. Only services from India Sales, advertisement and brand building expenses of over ₹ 75 crores vs. Nil R D expenditure of ₹ 437 crores v. NIL. 11.2 He has referred to following decision: a) Aginity Technologies ITA No. 3856/D/2010 b) CIT v. Aginity Technologies 262 CTR 291 (Del) c) Atrenta (India) Pvt. Ltd. d) Toluna India Pvt. Ltd. vs. ACIT (formerly Greenfield Online (P) Ltd. 166 TTJ 128 (Del) 11.3 On the other hand the ld DR relied on findings of DRP. 11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion that a captive unit of a comparable company which assumed only a limited risk, cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant. M/S PERSISTENT SYSTEMS LTD.: 12. The DRP repelled the objection of the assessee as under: The taxpayer primarily wants this comparable to be excluded on account of Functionally Different Significant RPT 10% Significantly high turnover The taxpayer submitted that The company is involved in diversified activities like testing, professional services and customer support (Source page 76 of Annual Report March 2010) However, as per P-82/AR Income The company is engaged in providing outsourced product development services to Independent Software Vendors (ISVs) and Enterprises. The company derives a significant portion of its revenues from export of software services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sys which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of M/s. Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT ITA No.1231/Bang/2010 relying on Dun and Bradstreet s analysis had held that turnover range of ₹ 1 crore to 200 crores is appropriate. The said proposition has followed by the earlier Benches of this Tribunal in the following cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT ITA No.1413/Bang/2010; (ii) M/s Genesis Microchip (I) Pvt. Ltd. DCIT ITA NO.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd ITA NO.1171/Bang/2010; (iv) M/s. Trilogy E-Business Software India Private Ltd. v. DCIT ITA No.1054/Bang/2011 dated 23.11.2012. 3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT (supra), relying on Dun and Bradstreet , has observed as under: 9. .we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores .. In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the following 8 companies will have to be eliminated from the list of comparables selected by the TPO, namely: Flextronics Software Systems Limited; iGate Global Solutions Limited; Mindtree Limited; Persistent Systems Limited; Sasken Communication Technologies Limited; Tata Elxsi Limited; Wipro Limited; Infosys Technologies Limited. It is ordered accordingly. 12.4 Following the aforesaid decision of the Tribunal and the judgment of Hon ble High Court of Delhi in the case of CIT v. Aginity Technologies (supra) we hold that Persistent Systems Ltd. should not be regarded as a comparable. 13 The next issue relates to treatment of foreign exchange fluctuation gain/loss as operating item. During the course of hearing, the learned counsel submitted that the foreign exchange loss cannot be accepted for the purpose of calculation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : 'where profit or loss arises to an asssessee on account of appreciation or depreciation ITA Nos.4446 4447/Del/2007 in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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