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TMI Blog2015 (11) TMI 1651X X X X Extracts X X X X X X X X Extracts X X X X ..... y the decision of the Hon’ble Supreme Court in the case of Woodward Governor’s (supra), 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. TP adjustment towards interest not realized from its AE on the debts arising during the course of business - Held that:- Interest has to be determined as per US currency and not as per the prime lending rate, as applied by TPO. Under such circumstance, we set aside the impugned order and remit the matter to the file of TPO for fresh determination on account of TP adjustment towards interest not realized from its AE on the debts arising during the course of business. X X X X Extracts X X X X X X X X Extracts X X X X ..... t for difference in Working Capital requirement. 15. The Ld. AO I DRP have erred in law and on facts, by initiating penalty proceedings under section 271 (I )(c) of the Act. 1.1. Subsequently vide application dated 11-8-2015 following modified grounds of Appeal were raised:- Amended Grounds No.2: "The Ld. A O/DRP have erred in sustaining the addition of ₹ 12,69,65,687 (Rs. 12.70 crores) by valuing the arm's length price of services rendered to it U.S. holding company at ₹ 111.45 crores as against aggregate price of ₹ 98.75 crores declared by the assessee" Amended Grounds No. 12: "The Ld. AD/DRP erred in not treating foreign exchange fluctuation gain/loss incurred in the revenue account for the purpose of computing the operating margin of the assessee as also of the comparables" 2. Brief facts of the case are that assessee is a wholly owned subsidiary of vCustomer US. In the relevant assessment year it was primarily engaged in providing IT enabled services to its parent company. The company has the expertise in providing process driven, quality centric BPO services, contract centre and technology enabled services through its sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit margin index. On the basis of the search carried out by assessee and after considering the assessee's submissions ld. TPO selected the following comparables to be used for benchmarking international transactions: S. No. Company name Adjusted OP/OC (%) 1. Accentia Technologies Ltd. 45.14 2. Cosmic Global Ltd. 25.23 3. E4e Healthcare 36.49 4. Fortune Infotech Ltd. 26.32 5. I-gate Global Ltd. 29.03 6. Infosys BPO Ltd. 35.11 7. Jindal Intellicom Ltd. 19.86 8. Microland Ltd. 2.65 9. Omega Healthcare 19.67 10. TCS E-Serve International Ltd. 60.38 11. TCS E-Serve Ltd. 70.21 Average 33.65 7. He, accordingly, made adjustment of ₹ 13,63,84,339/-, as under: Total cost : ₹ 84,09,51,143 ALP at a margin of 33.65% : ₹ 1,12,39,31,202 Price received : ₹ 98,75,46,863 Adjustment u/s 92CA : ₹ 13,63,84,339 8. Ld. DRP rejected all the objections raised before him, except directing the TPO, while disposing of objection no. 11, to rectify errors in computing margins. It observed that if miscellaneous income and other income are not related to the operation, the same should not be taken for calculation of profit, margin. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins will be erratic. That apart, a company that is very small in size does not have sufficient economic significance that it be used as a benchmark. 13. This finding was confirmed by ld. DRP, observing that the reliability of the financial data for companies with low levels of sales/operating income can be significantly reduced because the same persons are often both major shareholders and also the key employees, thereby obliterating the economic distinction between profits and salaries. Ld. DRP further observed that such companies lack competitive strength, lack operational efficiencies and also lack human resources and so give skewed results. 14. From the observations of both ld. TPO and DRP, it is evident that they have not examined the comparables having regard to the functions performed by them and in the light of Rule 10B(3). Both the lower authorities have made general observations without pointing out any material differences between the assessee and the comparables. If the functional comparability is there, then a comparable can be rejected, if it is demonstrated that the assets employed and risk assumed are significantly different from the tested party. This exercise ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ITAT dated 6-7-2015 in the case of Techbook International Pvt. Ltd. for AY 2010-11, contained at pages 649 to 699 of the PB, wherein this comparable has been excluded on account of this event, observing as under: "10. 1.2 . We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed .on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation or Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. D'Cl'T (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal 'in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that FY 2009-10 was the second year of operations for the company and first full year as a step down subsidiary of Tata Consultancy Services Ltd. (TCS). He pointed out that in the annual report itself it has been noticed by the company that as it became a part of the TCS/ Tata Group, this company, backed by TCS scale and large client base, had enhanced its services offering and had also started service new clients during the year under review. 22. Ld. counsel further pointed out that TPO included this comparable observing that the comparable was functionally same. Ld. counsel submitted that it is the company's first year of operation and, therefore, functionality is to be tested on the touch stone of the decision of Hon'ble High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. (supra) and the reasons for low/ high profit; low/high turnover should have triggered an inquiry. He further referred to page 458 of the PB, wherein the schedules 'M' 'Operation and other expenses' is contained and pointed out that Tata Brand Equity contribution was ₹ 37,38,000. Ld. counsel further referred to "Notes to accounts", contained at page 459 of the PB and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "10.2.2. …….. In order to properly appreciate the vital difference between these two types of companies, it is significant to note that a company which develops software is called a company rendering software development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a software for obtaining the desired results, is called a company providing non-development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively lowend 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 existin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Ltd., this company was not providing any technical service involving software testing, verification and validation of software etc. It was further observed that since the functional profile of this company on a boarder basis was not different from that of the assessee, both being involved in rendering ITES, this company was to be retained as comparable. 28. Ld. counsel referred to page 503 of the PB, wherein the annual report of this company is contained and pointed out that both the background and principal activity of this company were identical as that in the case of TCS e-Serve International Ltd., reproduced earlier, which was as under: "TCS e-Serve Limited is engaged in the business of providing information Technology- Enabled Services (ITES)/ Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally." 29. Ld. counsel further referred to page 515 of the PB, wherein the notes forming part of the financial statements are contained and in regard to the segmental information it has been observed that the company was engaged in business process outsourcing (transaction processing ) services to the Banking & financial services industry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one goes to make a comparison in the way suggested by the id. 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 cornparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the Lest 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 turnover of this company is concerned, we find that the Hon'ble Delhi High Court in Chrys Capital Investment Advisors (India) P. Ltd. Vs. DCIT has held, vide its judgment dated 27.4.2015, that high profit or high turnover is not a criteria to exclude an otherwise . comparable company. It is further noticed that the Hon'ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013 ) 219 Tasman 26 (Del) examined the comparability of Infosys Technologies from the angle of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". 33. Respectfully following the Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables. 34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra), the Tribunal has excluded this company from the list of comparables by observing as under: 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. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 39. We, therefore, direct for inclusion of this company in the list of comparables. 40. Micro Genetics Systems Ltd.: Brief facts are that ld. TPO on examination of annual report observed that the same did not contain data regarding related party transactions. He observed that as per the website of the company, this company was affiliate of CBay Systems Ltd., USA for medical transcriptions business. He, therefore, did not consider this as a comparable. 41. Ld. counsel submitted that the observations of ld. TPO are not correct. He referred to pages 309 to 323 of the PB, wherein the annual report of this company is contained and referred to page 322 where several d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/importer of goods/services enters into forward contract for sale/purchase of Forex to hedge itself from the fluctuation in exchange rates." 46. 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. 47. Before ld. TPO the assessee had submitted as under: "Remuneration model of the Assessee 4.1.1 As per the inter-company agreement entered into by the Assessee with its AE, the Assessee passes on the foreign exchange gain or loss to the AE and docs not bear the risk associated with such fluctuations. Therefore, in case of any foreign exchange loss is incurred by the Assessee, the same forms part of cost while getting reimbursed from AE on a cost plus mark up basis. The relevant extract of the inter-company agreement has been provided below: Section 4.3. cost: For the purposes of this Section, Cost shall incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the calculation of operating expenses and operating income respectively. Ld. DRP, accordingly, upheld the TPO's action. 49. Ld. counsel for the assessee submitted that during the year the assessee earned forex gain of ₹ 7.44 crores on sale proceeds of export service to the US AE which was received in US dollars. Ld. counsel further submitted that on the other hand ld. TPO included forex gain of ₹ 28.35 crores on sale proceeds in the case of TCS e-Serve Ltd. He pointed out that because of exclusion of forex gain in the revenue account in th caes of the assessee, its PLI (OP/OC) was reduced by TPO from 26.29% to 17.43%. Ld. counsel pointed out that the decision in thecase of DHL Express (India) Ltd., relied by ld. TPO has been distinguished in subsequent decision in Westfalia Separator India P. Ltd. 108 ITD 376. 50. As regards ld. DRP's reliance on Rule TA to Rule TU notified in 2013, ld. counsel submitted that the said rules are applicable from 18-9-2013 and prior to that the said rule has no application. 51. Ld. counsel further pointed out that in any case Safe Harbour Rule can be applied only when assessee opts for the same, but in the present case ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 & 14: These grounds relate to adjustments made on account of working capital adjustment by ld. TPO. Ld. TPO had made the working capital adjustment by using the OECD methodology given in Annexure to Chapter 3 of OECD guidelines on transfer pricing and applied SBI Prime Lending Rate as on 30th June of the relevant financial year, as the interest rate. He computed the working capital adjustment as under: "a) Compute the average of opening and closing balance of inventories, trade debtors/ receivables, trade creditors/ payable of both the tested party and the comparables on revenue account. b) Work out the net working capital ratio (in pecentage) after dividing the net working capital by operating cost/ sales of such denominator (as is used in the PLI) both for the tested party and the comparables. c) Determine the difference between the tested party's rate with that of each comparables. d) Thereafter multiply the above difference by interest rate i.e. SBASR as on 30.06.2009 i.e. 11.75% e) Lastly, these adjustments are to be added to the profit margin of comparable companies. 57. Ld. counsel pointed out that assessee is receiving only in US dollar and, therefore, the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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