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TMI Blog2020 (12) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... n exchange gain has to be taken as part of the operating profits to the extent that it has nexus with the international transaction in respect of which the ALP is being determined. As far as the issue with regard to treatment of foreign exchange gain as part of operating profit is concerned, this issue is no longer res integra and has been settled by the decision in the case of e4e Business Solutions P. Ltd. v. DCIT[ 2016 (3) TMI 356 - ITAT BANGALORE] . It has been held therein that the gains arising from fluctuation of foreign exchange having nexus with international transaction should be treated as operating income and taken into consideration while computing the operating profit of the assessee. Following the aforesaid decision, we direct the computation of PLI by treating the gains arising from fluctuation of foreign exchange having nexus with international transaction as part of operating income. TPO directed to compute the ALP of the international transaction in question in accordance with the directions contained in this order, after affording the assessee opportunity of being heard. Computation of deduction u/s 10AA - exclusion of telecommunication expenses loss bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, any income arising from an international transaction shall be computed having regard to the arm s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms Length Price (ALP) in respect of the aforesaid two international transaction of rendering ITeS to the AE. 3. As far as the provision of ITeS are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 15% by the Assessee in its TP study. The operating income was ₹ 279,48,41,942/-and the Operating Cost was ₹ 243,03,36,267/-. The Operating profit (Operating income Operating cost was ₹ 36,45,05,674/-. Thus the OP/TC was arrived at 15%. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average PLI 28.11% 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 12.4 Computation of Arm's Length Price: The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: Arm's Length Mean Margin on cost 28.11% Less: Working Capital Adjustment -0.01% (As per Annex. C) Adjusted margin 28.12% Operating Cost 2,38,85,43,050 Arms Length Price(ALP) 3,06,02,01,356 128.12% ( of Operating Cost) Price Received 2,79,48,41,942 Shortfall being adjustment u/s 92CA: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) and consequently erred in the computation of working capital adjustment as provided in the TP order. 15. That the learned AO/ learned TPO and the learned DRP erred in not considering the foreign exchange fluctuation gain earned by the Company as part of operations for the purpose of computing the Assessee's operating mark-up on total cost to arrive at the arm's length price. 9. As far as ground Nos.9 and 10 of the revised grounds of appeal is concerned, the learned Counsel for the assessee brought to our notice the decision of the Hon ble ITAT, Bangalore Bench in IT(TP)A No. 2297 / Bang / 2016 for Assessment Year 2012- 13 in the case of M/s. Societe Generale Global Solution Global Centre Pvt. Ltd., order dated 22.02.2019. In the aforesaid case, the assessee was a company engaged in the business of providing ITeS to its AE and the comparables chosen in the case of the assessee in this appeal were also chosen as comparable in the case of the aforesaid assessee. On the comparability of Infosys BPO Ltd., and TCS e-Serve Ltd., the Hon ble Tribunal held as follows: 13. On the segmentation of exclusion of Infosys BPO Ltd., the learned AR submitted that the turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities. 46. Respectfully, following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. 14. The learned AR supported his argument with the decision of the Delhi Tribunal in the case of Baxter India Pvt Ltd. vs. ACIT (85 taxmann.com 285) para.16 which reads as under: 16. Coming to Infosys BPO Ltd. he submitted that this company also should be rejected from the list of comparables. He submitted that the TPO rejected the contention of the assessee stating that the company is engaged in ITES and hence functionally comparable. The TPO further mentioned that the Annual Report does not mention anything in regard to brand deriving its profitability. According to the TPO, the brand in service industry may derive revenue but does not affect the profitability. Ld. counsel for the assessee submitted that Infosys B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties including delivery of core business processing IT(TP)A No.2297/Bang/2016 services, analytics and insights. The turnover being ₹ 1578.44 crores which is outside the range being 10 times and ld. AR supported his submission with the decision of CGI Information Systems Management Consultants (P) Ltd. (supra) and referred to paras.45 46 of the order and para.14 of the Delhi Tribunal decision in the case of Baxter India Pvt Ltd. (supra) which reads as under: 14. So far as the TCS e-Serve Ltd. is concerned, he submitted that the TPO rejected the contention of the assessee stating that the company is engaged in ITES and high turnover does not have any correlation with the profitability. He submitted that this company was rejected as a comparable in assessee's own case for assessment year 2011-12 on the ground of absence of segmental information and considerable brand value. He submitted that the TCS e-Serve Ltd. is functionally different. The company is engaged in ITES and software development services. Further, the segmental information between ITES and software development services are not available. The company has presence of brand and the services are provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was brought to our notice that before the DRP, the assessee raised a specific objection with regard to computation of working capital adjustment which is as follows: Further, the learned TPO, while computing the working capital adjustment, erred in considering the simple average of the effective State Bank of India benchmark prime lending rate (i.e. 13.85%) instead of considering the weighted average of the interest rate (i.e. 14.40%). The computation of the weighted average State Bank of India benchmark prime lending rate for financial year 2011-12 has been provide in the table below: Effective Date Effective till Days (A) Interest Rate (%) (B) Weighted Interest Rate% (B*A) 01-Apr-11 24-Apr-11 24 13.00% 312.00% 25 Apr-11 11-May-11 17 13.25% 225.25% 12-May-11 10-Jul-11 6o 14.00% 840.00% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operating profit of the assessee. Following the aforesaid decision, we direct the computation of PLI by treating the gains arising from fluctuation of foreign exchange having nexus with international transaction as part of operating income. 16. The TPO directed to compute the ALP of the international transaction in question in accordance with the directions contained in this order, after affording the assessee opportunity of being heard. 17. The assessee has also raised an issue with regard to computation of deduction under section 10AA of the Act. The relevant grounds raised in this regard reads as follows: Other than Transfer Pricing Related 1. That the learned AR erred in not allowing deduction under section 10AA of the Act on the entire profits of the undertaking amounting to INR 17,69,52,122. 2. That the learned AO has erred in reduction of telecommunication charges attributable to the delivery of computer software outside India of ₹ 1,13,57,110/- from the Export Turnover ( ET ) without corresponding reduction in Total turnover (TT) while computing deduction under section 10AA of the Act. 18. As far as the aforesaid grounds are concerned, gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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