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TMI Blog2015 (12) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... nor’s (2009 (4) TMI 4 - SUPREME COURT ), wherein it has been held that forex gain/ loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. - Decided in favour of assessee. - ITA no. 1310/Del/2015 - - - Dated:- 3-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring technical services, while the assessee is non-risk bearing entity in its support services segment. 3.2.4. In not allowing an adjustment on account of differences In the functions, assets and risks undertaken between the assessee and the comparable companies, as per the provisions of Rule 10B of Income Tax Rules which allow reasonable accurate adjustments to eliminate the material effects of differences. 3.3. The TPO as well as the DRP and consequently the AO have erred in law and on facts and in the circumstances in determination of the PLI of the assessee and the comparable companies by: 3.3.1. In applying the safe harbor rules (SAR) notified by CBDT to the assessee which have no retrospective application to A Y 2010-11 3.3.2. In treating the foreign exchange gain/loss as nonoperating nature. 3.3.3. In treating the provision of doubtful debts as nonoperating nature 4. That the proposed addition of ₹ 3,71,14,107/- is bad in the law and is prayed to be deleted. 5. That the Ld. AO has erred on the facts of the assessee's case in not allowing the complete credit of prepaid taxes. 6. That the penalty proceedings initiated u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company had entered into various transactions with its AEs and, therefore, in order to determine the ALP of the said transactions u/s 92CA(3) of the Income-tax Act, reference was made to the TPO by the AO. The main dispute in the present appeal is in regard to addition made on account of the ALP determined by ld. TPO in regard to provision of technical project management and marketing support services, which had been bench marked using TNMM method and adopting OP/OC as the PLI. PLI in assessee s case had been calculated at 10.21% by assessee and, accordingly, it was claimed that the international transactions were at ALP in view of the average PLI of 9.90% in the case of 13 comparables. In the services segment, the OP/OC computed in the TP study was as below: Particulars Amount in INR Revenue 321856258 Exchange fluctuation 2,74,998 Excess Provision written back 3,11,387 Total Income 32,24,42,643 Total expenses 29,25,59,385 Net Operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marine AS, Notway( RRMAS, Notway }. In this regard, the functions performed by RRIPL include: - Assistance and / or advice in repair and overhaul of Rolls- Boyce energy production and / or oil and gas distribution engines Making recommendations with respect to technical solutions and workflows to enhance repair and overhaul capability Provision of project management services - In addition to the above, RRTPL also rendered project management services to RRMAS, Norway. The nature of services rendered includes the following: - Review of the internal operations of the firm with the good practice framework - Co-ordination for procurement of equipments and supplies and expediting the process with suppliers - Co-ordination with Indian suppliers ill relation to supply of drawings and specifications - Controlling and reviewing the expenditure all a project and identifying and claiming additional Costs from clients - Planning and scheduling resource requirements for ongoing and future projects - Raising invoices in accordance with project milestones, issuing invoices to customer one collecting cash - Assistance in management of logistics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to the AE were in the nature of marketing support services, managerial services and some amount of technical support also. He observed that while using TNMM method, companies providing approximately similar services can be taken as comparable and, therefore, functional or service line was the type of functions being performed whether low or high end. He, thus, did not accept the assessee s contention that the comparables performing high end as well as low end services should be considered segmental wise having regard to the composition of proportion of high and low end services rendered by those comparables. He was of the opinion that those comparables would be selected which were particularly performing functions similar to the assessee and were providing market support service, technical and related business services and such comparables could not be rejected simply on the ground of high end activity. Thus, in sum and substance, ld. TPO did not agree with assessee s contention of not clubbing the high end and low end services. The AO, accordingly, determined the PLI at 20.98% as under: No. Name of the company OP/O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd., inter alia, observing that M.N. Dastur Co. Ltd. was more suitable to its O M segment. The AO, accordingly, passed the assessment order and determined the average PLI at 22.70% as under: S. No. Company Name Adjusted OP/OC (%) 1. Apitco Ltd. 40.09 2. Crystal Hues Ltd. 9.10 3. Cyber Media Research Ltd. 14.85 4. HSCC(India) Ltd. 18.32 5. Kitco Ltd. 14.01 6. Quadrant Communication Ltd. 13.11 7. RITES Ltd. 49.43 Average 22.70 12. The AO, accordingly, determined the ALP as under: Operating Cost 29,25,59,385/- Arm s Length Margin 22.70% Arm s length price (ALP) 35,89,70,365/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s contention regarding segmental details for the four service segment observing that personal cost, bank charges and administrative cost were not allocated to project and market support services. He referred to page 13 of the PB, wherein Schedule 10 to the P L A/c is contained to demonstrate that these costs had already been allocated to various service segments: Schedule 10: Director Service cost Operation and maintenance and project cost Personnel costs 35,220,913 16,337,585 Administrative and other Expenses 13,708,174 6,402,467 Material costs 61,550,179 28,205,075 Other costs 24,657,425 135,136,691 54,389,080 105,334,207 Project Management cost Personnel costs 1,339,459 2,926,398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparable either to a sales agent or corporate agency wherein gross remuneration range from 2 to 4% as was found out in the case of ICRA Management and Denave India Ltd. He submitted that as against this the assessee has got 6.52% assured return on its total cost. However, he did not seriously pressed for exclusion of these two comparables. Therefore, we do not go into this aspect. 23. Ld. counsel further submitted that turn-over filter applied by ld. TPO also should not be applied in view of the decision of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India)(P) Ltd. Vs. DCIT (2015) 277 CTR (Del) 137. 24. Ld. CIT(DR) referred to the decision of Hon ble Bombay High Court in the case of Tvonic India (P) Ltd. TS/301 ITAT/2014 (Mumbai) and submitted that a comparable can be rejected only on the ground of functional dissimilarly. He submitted that RITES Ltd. was assessee s comparable and, therefore, cannot be excluded. 25. Ld. CIT(DR) filed before us a copy of MAP agreement in the case of Rolls Royce India Pvt. Ltd. for A.Y. 2008-09 and 2009-10, which is also a subsidiary of Rolls Royce International Ltd. He pointed out that for both the years th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co Ltd. As far as RITES Ltd. is concerned, the said company is a government of India enterprise and is a multidisciplinary consultancy organization in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organizations. In overseas projects, RITES actively pursues and develops cooperative links with local consultants/ firms, as means of maximum utilization of local resources and as an effective instrument of sharing its expertise. This business profile of RITES Ltd., as given in the synopsis of assessee, has not been disputed. Therefore, it is evident that RITES Ltd. is a primarily imparting high end technical services, which cannot be compared with low end marketing business support services rendered by assessee, which primarily, are as under: Technical services Division operations maintenance management unit: The unit provides railway related technical support to captive railway systems for private and public sectors in India for power Industry, Steel and Aluminium plants, Ports etc. The unit has secured works from a number of clients in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not comparable to the functions performed by different service segments of assessee. We, therefore, direction for exclusion of this comparable from the list of comparables. KITCOLTD. 38. The functional profile of this company, as given in the synopsis filed by the assessee, is as under: 1. KITCO, the first technical consultancy organization (TCO) in India, was established in 1972 by Industrial Development Bank of India, other national and state level financial institutions, Govt. of Kerala and 7 Public Sector Banks for rendering services to Entrepreneurs, Govt. Departmental PSUs, Local Bodies, etc. Presently, Small Industries Development Bank of India (SIDBI) is the prime shareholder with 49% shares of the company. 2. The aim of setting up of TCO, which had the blessing of Govt. of India and the Reserve Bank of India, was to provide professional technical consultancy assistance to banks by appraisal of projects for priority sector lending and to entrepreneurs in the 5MB Sector by way of preparation of Project Reports Market Studies and conducting training programmes for entrepreneurship development. Subsequently similar TCOs were set up in almost all the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time resulting into Forex gain/loss due to variation in the exchange rate from the date of transaction to that of conversion of Foreign exchange into Indian currency. An exporter/importer of goods/services enters into forward contract for sale/purchase of Forex to hedge itself from the fluctuation in exchange rates. 44. He observed that the amount of forex loss/ gain and hedging cost/premium in each case would depend upon the risk management policy of each company and, therefore, the profit margin at the end of the year may vary substantially from the expected profit margin at the time of entering into project because of fluctuation in the exchange rate and its risk management policy i.e. the extent of which its Forex transactions were hedged. 45. Ld. counsel submitted that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods or services is to treated as part of the price of import or the value of export of goods or services. He relied on the decision of Hon'ble Supreme Court in case of CIT v. M/s Woodward Governor India Private Ltd. For this proposition he also referred to the decision of Bangalore IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impeachable view by considering the forex loss of' 50.04 lac as a part of operating cost. The same is, therefore, countenanced . 48. He also relied on following decisions: - DCIT vs. M/s. Luxottica India Eyewear Pvt. Ltd. [ITA No.617/Del/2014], - M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. DCIT [ITA No. 1961/Hyd/2011 ] - M/s Bearing Point Business Consulting Pvt. Ltd. vs. DCIT [ITA No. 1124/Bang/2011 ] 49. Ld. CIT(DR) relied on the TPO s order. 50. We have considered the rival submissions and have perused the record of the case. We find considerable force in the submission of ld. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue account. This issue is squarely covered by the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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