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TMI Blog2017 (9) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... - Held that:- Even application filed on 03.04.2013 has not been disposed off to exclude the FBT in case of assessee as the same has been excluded while computing the margins of comparable companies. Even, ld. Senior DR attending the case for the last three years has not preferred to direct the quarter concerned to comply with the directions issued by higher Revenue Authorities, the ld. DRP in this case. This is a case of complete lack of empathy and voluntarism on the part of lower Revenue Authorities by not complying with the order of the higher authorities. So, we hereby direct the TPO/AO to comply with the directions issued by the ld. DRP to exclude FBT while computing the margins of assessee as has been done in case of comparable companies to arrive at a correct computation of the margins of assessee as well as comparable companies. Computing the operating margin - Held that:- We consider the amount of foreign exchange gain/loss from foreign exchange fluctuation being non operating items as per Safe Harbour Rules while computing the operating margin of the comparable company as well as assessee company from provisions of IT Support services. - Decided in favour of assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the appellant and adding certain companies to the final set of comparable companies on an ad-hoc basis, thereby resorting to cherry picking of com parables from the accept and reject matrix of the Appellant to determine ALP. 6.1. the learned AO/TPO/DRP has erred, in law and on facts and circumstances of the case, in including certain companies listed below to the final set of com parables, even though these companies are non-comparable to the assessee on various grounds, to benchmark the impugned transaction of the assessee: Coral Hub Limited; Cosmic Global Limited; and eClerx Services Limited 6.2. the learned AO ITPO ! DRP has erred, in law and on facts and circumstances of the case, by wrongly excluding certain companies as below from the final set of comparables to benchmark the impugned transaction of the assessee on an ad-hoc basis: CG-VAK Software Exports Limited R Systems International Limited Cepha Imaging Limited; and Fortune Infotech Limited 7. The learned TPO/ AO/ DRP have erred in passing an order which has computational errors in the margin of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumentation / publication which were never furnished to the appellant and without prejudice are not relevant to the issue and pray that the deduction claimed be allowed. 10.3 The Learned AO has also erred on facts and in law in failing to appreciate: a) that the activities of the appellant were also examined and upheld by the Commissioner of Income Tax (Appeals) and thereafter by the Hon'ble Income Tax Appellate Tribunal, for the assessment years 2002-03 and 2006-07 which had determined that the appellant is engaged in the business of IT Enabled services. b) that the activities of the appellant were also examined and upheld by the office of the Learned AO for the assessment years 2003-04, 2004-05 and 2005-06 and thereby, a mere change in opinion. c) that the Learned Transfer Pricing Officer, an Officer of the Indian Revenue, has also in his order dated 23 January, 2013 issued after examination of the company's Transfer pricing documentation and functional and economic analysis contained therein has completed the Transfer Pricing Assessment of McKinsey as a company engaged in rendering ITIIT enabled services. 12. The finding of the Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies being a captive contract service provider. During the year under assessment, assessee has entered into international transactions to the following effect :- S.No. Nature of international transaction Value (in INR) Method used 1 Provision of research and information services 1,851,463,486 TNMM with OP/OC as PLI 2 Provision of IT Support services 55,498,438 3 Reimbursement of expenses by AEs 9,471,136 No benchmarking required 3. Assessee company in its Transfer Pricing (TP) study by taking four comparables in order to benchmark its transaction qua provision of IT Support Services computed the mean margin of comparables at 19.53% as against its own OP/OC at 18% and treated its international transaction at arm s length. However, Transfer Pricing Officer (TPO) has selected eight comparables for benchmarking the international transactions of the assessee in ITES segment and arrived at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on are to be excluded; ( j) Companies having different financial year ending (i.e. not March 31, 2009) or whose data does not fall within the relevant 12 month period, i.e. 01- 04-2008 to 31-03-2009, are to be excluded; ( k) Companies that are functionally different from the taxpayer company (tested party) are to be excluded; ( I) Companies that are having peculiar economic circumstances are to be excluded; and ( m) Companies that are duplicated in the data base with different names or merged to form another company are to be excluded. 9. By applying the aforesaid filters, the ld. TPO for the purpose of benchmarking the international transactions of the assessee in ITES segment selected 8 comparable companies as under :- Sl.No. Comparable Companies OP/OC 1 Aditya Birla Minacs Worldwide Ltd. 28.83% 2 Cosmic Global Limited 48.20% 3 eClerx Services Ltd. 47.00% 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctional Net Margin Method (TNMM) as the most appropriate method to determine the ALP of the international transaction pertaining to the provision of IT support services. The TPO in the order accepted only 7 out of the 11 comparable companies and rejected the rest based on reasons that one of them, Fortune Infotech Ltd. ( FIL ) had a different financial year ending, the other two - Kirloskar Computer Services Ltd ( KCSL ) and Mercury Outsourcing Management Ltd. ( MOML ) had a turnover of less than ₹ 1 Crore and finally, Genesis International Corporation Ltd ( GICL ) was rejected because it seemingly had a negative growth graph. 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. ( e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; ( f) the nature, extent and reliability of assumptions required to be made in application of a method. Rule 10B (3) stipulates the third step, and spells out when the TPO is obliged to hold an uncontrolled transaction as comparable with others. This provision reads as follows: ( 3) An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if ( i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or ( ii) reasonably accurate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee challenging the impugned order contended that the AO has committed computational error in the margin of the comparable companies for benchmarking the international transactions despite the fact that this issue was raised before ld. DRP and a specific order was passed in this regard. For facility of reference, argument addressed by ld. AR before the ld. DRP and findings thereof are reproduced for ready perusal as under :- 10.1 The assessee has pointed out certain 'computational error in margins of assessee and comparables. The assessee has pointed out that whereas FBT has been excluded for computation of margin in case of comparables, it has been included in case of the assessee. Further, uniform treatment has not been given to gains/loss from foreign exchange fluctuations while computing margins of the assessee and those of comparables. 10.2 DRP has considered these arguments. The TPO is directed to take FBT as non-operating expense In case of assessee also when it has been taken so in case of comparables. Further, gains/loss from foreign exchange fluctuations being nonoperating items even as per safe harbor rules should be treated so in case of both com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies. Even, ld. Senior DR attending the case for the last three years has not preferred to direct the quarter concerned to comply with the directions issued by higher Revenue Authorities, the ld. DRP in this case. This is a case of complete lack of empathy and voluntarism on the part of lower Revenue Authorities by not complying with the order of the higher authorities. So, we hereby direct the TPO/AO to comply with the directions issued by the ld. DRP to exclude FBT while computing the margins of assessee as has been done in case of comparable companies to arrive at a correct computation of the margins of assessee as well as comparable companies. So, ground no.7 is determined in favour of the assessee for statistical purposes. GROUND NO.8 18. Ld. AR for the assessee challenging the impugned order contended that TPO/AO/DRP have erred in not considering gains/losses arising out of foreign exchange fluctuations while computing the operating margin of the comparable companies as well as assessee for IT Support services an relied upon decision rendered by the coordinate Bench of the Tribunal in assessee s own case bearing ITA No. 154/Del/2016 order dated 15.12.2016 . For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction. Eventually, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. 67. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. 68. The reliance of the ld. DR on Safe Harbour rules to contend that foreign exchange gain or loss be taken as non-operating, is not sustainable. There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is relevant to note that such rules are not applicable to the assessment year under consideration. Even the reliance of the ld. DR on certain decisions taking cognizance of safe harbour rules for the period anterior to their insertion in other contexts do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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