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TMI Blog2015 (7) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... rest and bank charges in the Annual accounts of the assessee. It is noticed that the assessee is not aggrieved against the treatment of bank interest as non-operating. We do not see much difference between the nature of bank charges and bank interest. As the amount of bank interest has been admitted as an item of non-operating expense, the amount of bank charges also assumes the same character as that of bank interest. In our considered opinion, both the bank charges as well as bank interest should have been considered as non-operating in the case of the assessee as well as comparables. The TPO is directed to verify whether the treatment of bank interest and bank charges in the case of the assessee’s computation of ALP and that of the comparables is in accordance with our above observations. Needless to say, the assessee will be afforded a reasonable opportunity of being heard. Provision for doubtful advances taken as operating in assessee case and as non-operating in the case of the comparables - Held that:- The assessee has not created any provision for `doubtful debts’. The only provision made by it is of `doubtful advances’. Both the provision for bad debts as well as doubtf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the removal of this company from the final set of comparables. TCS e-Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/turnover have been brought to our notice. Consequently, we hold that the authorities below were justified in including this company in the list of comparables. i-Gate Global Solutions Sdn. Bhd. amalgamation took place with the approval of the members of the company on 12.8.2009 and subsequently sanctioned by the Hon’ble High Court by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordinary financial event, which renders it unfit for comparison with the assessee company. Infosys BPO - Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables. R. Systems International Ltd. (Seg.); Jindal Intelicom Pvt. Ltd.; and Caliber Point Business Solutions Ltd. - As amounts of operating profit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving rise to such income In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in the case of Cotton Naturals (I) Pvt. Ltd. (2015 (3) TMI 1031 - DELHI HIGH COURT ), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 33.71%. By applying this profit margin to the operating costs incurred by the assessee in rendering the ITES, the TPO worked out a transfer pricing adjustment of ₹ 20,48,76,996/-. The assessee largely remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the AO made addition of ₹ 20.48 crore on account of transfer pricing adjustment in the international transaction of Provision of IT enabled data conversion services. The assessee is in appeal against this addition. 3. We have heard the rival submissions and perused the relevant material on record. The assessee has agitated certain issues about determination of the ALP of the international transaction of the provision of ITES before us, which we will consider herein below. I. FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS 4.1. The first issue argued before us is against the exclusion of foreign exchange fluctuation gain/loss from the operating revenue/cost of the assessee as well as the comparables. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost. 4.4. Since, the TPO has computed PLI of the assessee as well as comparables by ignoring the amount of forex gain/loss, we set aside the impugned order and remit the matter to the file of TPO/AO to recompute the assessee s margin as well as that of the comparables by considering foreign exchange gain/loss as an item of operating revenue/cost. We want to make it clear that our finding in this regard is restricted to considering forex gain/loss from the transactions of the revenue nature as part of operating revenue/cost. If some part of forex gain/loss turns out to be relatable to transactions on capital accounts, then that part cannot be considered as part of operating revenue/cost. Similar view has been taken by the Tribunal in the assessee s own case for the immediately preceding assessment year, namely, 2009-10, a copy of which order has been placed on page 908 of the paper book. II. BANK CHARGES 5.1. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, the same has been rightly taken as an item of operating expense of the assessee. The TPO is directed to treat the amount of provisions for doubtful debts/advances as operating in the case of the comparables as well. IV. RISK ADJUSTMENT 7.1. The ld. AR vehemently argued that the TPO erred in not allowing any risk adjustment. It was submitted that the assessee is a captive unit providing ITES to its AE alone, thereby running no risk of any bad debts etc. Per contra, the ld. DR opposed the grant of risk adjustment by relying on the relevant parts of the order of the TPO. 7.2. We have heard the rival submissions and perused the relevant material on record. The TPO has referred to several tribunal decisions in which risk adjustment has been denied to the assessee. At the same time, the ld. AR has also drawn our attention towards some of the tribunal decisions, in which such an adjustment has been allowed. In fact, there cannot be a general rule of allowing or not allowing risk adjustment. Risk is nothing but a possible adverse perception in the given circumstances, which may or may not finally fructify. Generally, risks and rewards go side by side. Higher the risk, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of its Profit Loss Account containing details of operating and other expenses. It transpires from such Schedule that the assessee has claimed deduction for Provision for doubtful advances amounting to ₹ 17,11,167/-. On a pointed query, the ld. AR submitted that this provision was created in respect of expenses incurred by the assessee in rendering the services to the AE and not on the realization of sale proceeds. We fail to appreciate the rationale of this contention that the assessee assumes no risk of realization of invoices from its AE, but there may be a risk of advances given for expenses incurred during the course of rendering services. Ultimately risk is risk, whether it is of realization of invoices or of advances given for conducting operations. Since the aspects of incurring expenses and earning revenue are two sides of the same coin, we find that the existence of risk to the assessee cannot be denied. Be that as it may, it is further found that though there is no Provision for doubtful debts (arising from realization of invoices) during the year, but, the assessee did create provision for doubtful debts in the preceding year amounting to ₹ 10,79,665/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated party transactions fall below that barrier, then such company would again become comparable. To put it simply, if company A has been held to be incomparable vis-a-vis company B , then it is not essential that company A would be incomparable to company C also. What is relevant to consider is, firstly, the functional profile of company A vis-a-vis company C . If both are functionally similar, then notwithstanding the fact that company A was held to be incomparable to company B , it may still be comparable to company C . Despite the fact that company A is functionally similar to company B , it may still have been declared as incomparable to company B because of other relevant reasons. If company A passes the same reasons vis-a-vis company C , then company A will find its place in the list of comparables of company C , notwithstanding the fact that it was held to be incomparable to company B . The crux of the matter is that the mere fact that company A has been held to be not comparable in a judicial order passed in the case of company B , does not per se make it incomparable in all the subsequent cases to follow. Not only company A held to be incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. ii) TCS E-Serve International Ltd. 10.2.1. The assessee objected to the inclusion of this company on the ground that it provided financial information processing and customer contact services with high level of foreign expenditure and abnormal profits. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering the comparability. Eventually, this company was included in the final set of comparables. 10.2.2. We have heard the rival submissions and perused the relevant material on record. Relevant parts of the Annual report of this company are available on pages 458 onwards of the paper book. Notes to Accounts indicate that this company is engaged in the business of providing IT enabled services/BPO services primarily to Citigroup entities globally. The operations of this company : broadly comprise of transaction processing and technical services. Transaction proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non-development services performs a relatively low-end service. Thus the line of distinction is that whereas a company providing software development services helps in the creation, maintenance or updation of a software, on the other hand, a company providing non-development software services obtains the desired result with the use of an existing software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. From the above discussion, it is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services. 10.2.3. We find that the assessee is a company providing nondevelopment software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other hand, this company is also providing `Technical services to its AE involving software testing, verification and validation of software, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this objection. Matching of the exact functional similarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the ld. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails. 10.3.3. In so far as the objection of the ld. AR about the high profit/high t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt by its order dated 24.2.2010. As the financial results of this company also include the results of amalgamating company, in our considered opinion, this is an extraordinary financial event, which renders it unfit for comparison with the assessee company. While discussing the comparability of Accentia Technologies Ltd. (supra), we have referred to certain decisions in which it has been held that a company loses the tag of comparability due to amalgamations, mergers, etc., taking place during the year in question. Adopting the same reasoning, we order for the exclusion of this company from the list of comparables. v) Infosys BPO 10.5.1. The TPO included this company in the list of comparables. The assessee s objections against its inclusion were overturned. 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the data relating to the financial year in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparables must also have the data relating to the financial year ending 31st March itself. If such a data is not available, then, a company albeit comparable, also disqualifies. Espousing the facts of the extant case, we find that insofar as the functional comparability of these three companies is concerned, the TPO has not disputed the same. The only reason given for their exclusion is the non-availability of data for the relevant financial year. The ld. AR contended that though the year ending of the above referred three companies was either different or financial year included results for 15 months, yet, the assessee was in a position to put forward the data of these three companies for the financial year 1.4.2009 to 31.3.2010 from their Annual reports only. It was so stated on the basis of the availability of the quarterly data from the Annual reports of these companies, which could be adjusted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. iii) Micro Genetics Systems Ltd. 12.3.1. The TPO excluded this company from the list of comparables by observing that its turnover was only ₹ 2.44 crore and, hence, it failed the turnover filter. 12.3.2. We do not find any reason to exclude this company from the list of comparables merely on the ground that its turnover is less. The reasons given above while considering the comparability of CG-VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables. However, the TPO is directed to verify the correctness of OP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f non/late realization of export invoices furnished by the assessee, the TPO held that the assessee ought to have charged @ 15% p.a. on receivables as on 1.4.2009 which were outstanding for more than 60 days; and export proceeds not realized within 60 days from the date of invoice during the year. These two amounts were calculated at ₹ 3.16 crore and ₹ 2.69 crore, making total TP adjustment for interest at ₹ 5.86 crore. That is how, the TP adjustment on account of interest to be charged on non-realisation of export proceeds to the tune of ₹ 5.86 crore and odd was proposed and added by the AO in the final assessment order. The assessee is aggrieved against this addition. 13.2. The ld. AR contended that the Agreement between the assessee and its AE does not provide for any charging of interest and, hence, there can be no question of any notional/hypothetical interest income as has been determined by the TPO. To support the non-charging of interest, he relied on the judgment of the Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India and Others (2014) 368 ITR 1 (Bom.). He buttressed the same argument by relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is obvious that the facts of the instant case are absolutely different from those considered in the case of Vodafone India Services Pvt. Ltd. (supra). The base amount on which interest was calculated by the TPO in the case of Vodafone India (supra) was itself a capital receipt not chargeable to tax and not a trading debt arising during the course of business, which issue has been discussed in the immediately succeeding paras. Instantly, we are concerned with the late realization by the assessee of trading debt from its AE which is otherwise a revenue receipt and has also been offered for taxation. 13.5. At this juncture, it is apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression international transaction in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- ` Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression international transaction shall include- (a) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 13.9. The foregoing discussion divulges that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. 13.10. In so far as the reliance of the ld. AR on the judgment in Cotton Naturals (I) Pvt. Ltd. (supra) is concerned, we find the facts of that case to be distinguishable. In that case, a loan was advanced by that assessee to a wholly owned subsidiary in the USA. The assessee selected the Comparable Uncontrolled Price (CUP) method to benchmark the interest received on the loan and claimed that the interest received @ 4% was comparable. The TPO held that the arm s length interest rate should be taken at 14% per annum. This was reduced to 12.20% by the DRP by adopting the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO s order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction of Provision of IT Enabled data conversion services and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B. 13.13. In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon ble jurisdictional High Court in the case of Cotton Naturals (I) Pvt. Ltd. (supra), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations. 14. In the result, the appeal is allowed for statistical purposes. The order pronounced in the open court on 06.07.2015. - - TaxTM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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