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TMI Blog2021 (3) TMI 803X X X X Extracts X X X X X X X X Extracts X X X X ..... erating loss making company. Taking the totality of facts and circumstances, we direct the TPO/AO to include this company i.e. Cat Technologies Limited in the final set of comparables with that of the assessee. Evoke Technologies Pvt. Ltd. - As assessee who included this company in the list of comparables. As such, the primary burden of proving comparability was on it. It is just elementary that comparability can be established with reference to various factors. Apart from filters, it is essential to consider the nature of business of the company and other qualitative information, such as, related party transactions, mergers and acquisition etc. if any and the detailed composition and manner of revenue recognition, which predominantly help in deciding the comparability. Such qualitative information can be obtained only from the Annual Report of the company for the relevant year. Simply relying on the quantitative figures for the year under consideration with reference to the Annual Report of the company for the succeeding year does not in any manner assist in deducing the qualitative information and the resultant comparability. It is a matter of record and admitted position t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT Vs. Hindustan Unilever Ltd [ 2016 (7) TMI 1245 - BOMBAY HIGH COURT] has observed that Transfer Pricing adjustment has to be done only in respect of international transaction with Associated Enterprises. The Pune Bench of the Tribunal in the case of DCIT Vs. Magna Steyr India P. Ltd. [ 2018 (10) TMI 1886 - ITAT PUNE] had occasion to refer the decision of the Hon‟ble Bombay High Court in the case of CIT Vs. Thysseen Krupp Industries India Pvt. Ltd., [ 2015 (12) TMI 1076 - BOMBAY HIGH COURT] wherein it has been held the transfer pricing adjustment, if any, has to be made vis- -vis associated enterprises transaction and not on entity level. Accordingly, Pune Bench of the Tribunal directed AO/TPO to re-compute the ALP of international transactions of the assessee with its associated enterprises on the basis of the transactions with associated enterprises only. Respectfully following the above referred judicial pronouncements, we direct the AO/TPO to determine the TP adjustment, if any, to be restricted to the international transactions of the assessee with its Associated Enterprises only - ITA No. 1692/PUN/2018 - - - Dated:- 22-1-2021 - SHRI R.S.SYAL AND ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law by rejecting companies from the set of comparables identified by the Appellant in the TP report in respect of international transaction pertaining to provision of software development services. Cat Technologies Limited Evoke Technologies Private Limited Maveric Systems Limited 6. Inappropriately selecting companies which are not comparable to the Appellant Erred on facts and in circumstances of the case and in law in inappropriately selecting additional companies which are not comparable to the Appellant. Persistent Systems Limited Thirdwiare Solution Limited 7. Inappropriately rejecting additional companies that can be considered as comparable to the Appellant Erred on facts and in circumstances of the case and in law by rejecting certain additional companies identified as comparable by the Appellant in respect of international transaction pertaining to provision of software development services. 8. Inappropriately rejecting risk adjustment Erred on the facts and in circumstances of the case and in law by comparing the full-fledged risk bearing entities with the Appellant' operations without mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 409,04,02,898 TNMM 2. Recovery of expenses 1,78,90,314 At Actual 3. Reimbursement of expenses 3,82,09,150 At Actual Total 414,65,02,362 The Transfer Pricing Officer (TPO) found various faults in the TP study report filed by the assessee. It was found that the assessee has incorrectly used 3 years data in the case of the comparables for benchmarking analysis using TNMM in violation of Rule 10B(3). The TPO also used various filters as mentioned in Page 5 of his order. Thereafter, only four comparables namely persistent Systems Ltd, R.S. Software (India) Limited, Saskan Technologies Communication Ltd and Cigniti Technologies Ltd were selected out of the 21 comparables selected by the assessee as per TP study report. The TPO also carried out further search and identified various other comparables including the four above. However, after considering the assessee‟s objection and application of filters only one more comparable i.e. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the world currency markets etc. Hence, the gain or loss due to foreign exchange rate fluctuations cannot be considered to be part of operating revenues or expenses in this situation. In the second situation mentioned above, the amount of Foreign exchange gain/loss and the hedging cost/premium will vary depending upon the Risk management Policy adopted by the concerned enterprise which has entered in to the import/export transaction. Some enterprises may not hedge their foreign exchange positions while others may hedge their foreign exchange exposure either wholly or partly. The Risk management policy of each company is its internal matter and it has nothing to do with the operational transactions entered into by it with its AEs. An enterprise enters into contract with other enterprises to provide/procure services or goods on the basis of (i) cost of such services/goods, (ii) prevailing exchange rate and (iii) the profit margin expected by it. However, the actual profit margin at the end of the year may vary Substantially from the expected profit margin at the time of entering into the contract due to fluctuation in the exchange rate and its risk management policy, i.e., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but realize the sale proceeds on different dates, their PLI computed by including the FE gain/loss in the operating revenue would be different due to the difference in the quantum of the gains/loss arising from the difference in the exchange rate on the said dates of realization. (ii) Where the two enterprises have exported the same product on the same date at the same net margin to different countries with different currencies, their PLI computed by including the FE gain/loss in the operating revenue would be different due to the difference in the extent of fluctuation in the exchange rates of the two currencies from the date of sale to the date of realization of the sale proceeds. Further, it is relevant to note that Rule 10TA of IT Rules forming part of safe harbour rules dealing with the definition of Operating revenue and Operating expense prescribe the exclusion of the income/loss arising on account of foreign currency fluctuations from the operating revenue/expense. Though the assessee has not opted for safe harbour rules and the said rules are not applicable to the assessee for the purpose of acceptance of the transfer price if it has resulted in an operating m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decisions of the Hon‟ble ITAT Mumbai, apart from the detailed reasons cited in the preceding paragraphs, to hold that the foreign exchange fluctuation gain/loss should be treated as non-operating income/expense for the purpose of computation of PLI of the tested party and the comparables. The assessee's ground in this regard is accordingly rejected. 7. Taking forward the contention of the assessee that the foreign exchange gain/loss has to be treated as operating in nature, the Ld. Counsel for the assessee submitted that there are various decisions of the Tribunal and the Hon‟ble High Courts, where this issue has been decided in favour of the assessee. Referring one of such decision enclosed at Page 700 of legal compilation of the paper book, the Ld. Counsel for the assessee has placed reliance on the decision of the Pune Bench of the Tribunal in the case of M/s. Extentia Information Technology Pvt. Ltd. Vs. DCIT, in ITA No.2331/PUN/2017 dated 04.03.2020, vide Para 21 to 24 on the said issue it has been held as follows: 21. First of all, we take up the assessee‟s objection regarding treatment of foreign exchange (forex) gain/loss given by the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The Hon‟ble Delhi High Court in Pr. CIT VS. Cashedge India Pvt. Ltd., vide its judgment dated 4.5.2016 in ITA 279/2016, has held that : `So far as the question of fluctuation of foreign exchange was concerned, the ITAT ruled that the relevant provision, i.e. `Safe Harbour Rules‟ had not been notified for the concerned assessment year and were, therefore, inapplicable‟. Thus the Hon‟ble High Court did not disturb the operating nature of forex gain/loss as held by the tribunal. 24. We note from the Notes forming part of the Accounts of the assessee for the year under consideration that one of the transactions involving fluctuation in foreign currency is in the capital field, which is, `Purchase of capital goods worth ₹ 13,85,590/-.‟ Forex gain/loss in respect of such a transaction cannot be considered as a part of operating expense/income. The ld. AR candidly admitted that the TPO considered forex gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and offered for taxation. 16.2 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 comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has also been admitted by the ld. DR that the same is in relation to the trading items emanating from the international transactions. When the foreign exchange loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. 16.3 The Special Bench of the Tribunal in Asstt. CIT v. Prakash I. Shah [2008] 115 ITD 167 (Mum) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables which are (A) Cat Technologies Limited (B) Evoke Technologies Private Limited and (C) Maveric Systems Limited. (A) Cat Technologies Limited : 11. The Ld. Counsel for the assessee submitted that the TPO has rejected this company due to persistent loss making company. Further, it is contented that Cat Technologies Limited, it would be persistent loss making company, if the forex is taken as non-operating in nature. However, if forex is taken as operating in nature, Cat Technologies Limited will not be considered as persistent loss making company. The Ld. Counsel for the assessee relied on the decision of the Hon‟ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt. Ltd. wherein it was held that comparable cannot be excluded only because it is incurring losses. 12. The Ld. Counsel further referring to Page 347 of the factual paper book wherein profit and loss account of the Cat Technologies Limited as on 31.03.2012 has been placed and therein, under head other income there is foreign exchange realization profit is at ₹ 10,037,962/-. Further, at Page 350 which is notes relating to profit and loss account as on 31.03.2012 of Cat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Cat Technologies Limited in the final set of comparables with that of the assessee. (B) Evoke Technologies Pvt. Ltd. 17. The next company which the assessee wants to include in the final set of comparables is Evoke Technologies Pvt. Ltd. The Ld. Counsel for the assessee submitted that the revenue from exports is more than 99% and the details of FY 2013-14 are available in the annual report for FY 2014-15 which is available in public domain and therefore, consider this company to be as comparable. 18. The Ld. DRP with regard to this company i.e. Evoke Technologies Pvt. Ltd. has held and observed as follows : iv) Evoke Technologies Pvt. Ltd. + This entity was rejected by the TPO by applying export filter. The TPO has discussed this issue in para 7.5(iv) of his order. It is contended that the Annual Report for' F.Y. 2013-14 is not available and further the export revenue is less than 75% of the total revenue, as per segmental chart reproduced by the TPO. The assessee contends that the Annual Report of F.Y. 2014-15 was available from where necessary details were culled out relevant to current year and further that the TPO used the geographic segments. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee wants to include in the final set of comparables is Maveric Systems Ltd. The Ld. Counsel for the assessee submitted that during the FY 2013-14, Maveric had obtained permission for relocation of its SEZ unit. The relocation of business cannot be considered as peculiar circumstances as it is normal for an organization and does not change business functions or circumstances to a large extent. That also the compensation amount is reported as exceptional item in profit and loss account and is not considered for the purpose of calculating TNMM. Accordingly, impact, if any, in relation to this event is already excluded while calculating operating margins of Maveric. 21. The Ld. DRP with regard to this company i.e. Maveric Systems Ltd. has held and observed as follows: v) Maveric Systems Ltd. The TPO has discussed this issue in para 7.5(vi) of his order. It is noticed that this company has relocated its SEZ unit during the year under consideration and has received compensation for the relocation. The compensation has been shown as an exceptional item of income by the assessee and was excluded from the operating income. The assessee contends that though there was compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the factor of relocation of its SEZ unit cannot be considered as extraordinary event for the year. However, it is also an admitted position that this company received compensation of ₹ 4,96,31,866/- on account of such relocation which was shown as income during the year in the P L account under Exceptional item , but was not considered as operating revenue. Since this income on account of relocation relates to the very fact of relocation, the income on account of such relocation also needs to be considered as item of operating revenue. Though the assessee was contesting before the Authorities below that the income of ₹ 4.96 Crore should not be taken as operating revenue, but, it was fairly conceded by the Ld. AR before the Tribunal that this income can be included in the operating revenue of this company for the purpose of determining its PLI. We, therefore, direct to include this company in the final list of comparables. Further, we clarify that in computing the PLI of this company, income of ₹ 4.96 Crore should also be taken as a part of operating revenue. 23. With regard to Ground No.6, the assessee has contended that the Revenue Authorities has inappr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Pr. CIT Vs. Saxo India Pvt. Ltd. ITA No.682/2016 has held as follows: 10. On a comparison with the data available and made available undoubtedly, the object of the statute is to pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ . The TNMM method depends on accurate data with respect to all the three elements- wherever they apply. In the Comparable Uncontrolled Price (CUP) method-which is premised upon the elements in Rule 10B(1)(a), the methodology adopted in the price charged or paid for property transfer or services provided in the Comparable uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue Of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore the reasons given by the T PO should be regarded as the conclusions of the DRP. We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP. 13. The Co-ordinate Bench of the Tribunal, Cochin in the case of US Technology International Private Limited Vs. ACIT in ITA No.592/Coch/2018 has held as follows: 10. Persistent Systems Ltd. The TPO obtained information u/s. 133(6) based on which it was concluded that the comparable is predominantly engaged in the business of rendering software development to various customers world wide. The TPO observed that the company is engaged in developing products which have been outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that the comparable is predominantly engaged in the software development services. Further, the intangibles with the comparable ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice u/s. 133(6) of the Act, software development constitutes 90% of its revenue. In this view of the matter, the Assessing Officer included this company, i.e., Persistent Systems Ltd. in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the ld. Authorised Representative submitted that: i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company is predominantly engaged in Outsourced Software Product Development Service‟ for independent software vendors and enterprises. iii) Website extracts indicate that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows: 13.2 We have considered the rival submissions as well as the relevant material on record. As pointed out by the learned AR of the assessee that the functional comparability of the company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para 17.3 as under: 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company, i.e., Persistent Systems Ltd., is engaged in product development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparable analysis, we hold that this company, i.e., Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company. Therefore, we direct the AO/TPO to exclude Persistent Systems Limited from the final list of comparable companies with regard to its software development service segment. (E) Thirdware Solutions Limited : 28. The assessee submitted that Thirdware Solutions Ltd. has derived its entire revenue from sale of products and this company has made purchases of stock and holds inventory which highlights that the company is engaged in purchase and sale of products and therefore, it is not functionally comparable with that of the assessee. 29. The Ld. Counsel for the assessee has placed reliance on the decision of the Pune Bench of the Tribunal in the case of Symantec Software India Private Limited Vs. DCIT (supra.), wherein on identical set of facts, Thirdware Solutions Limited was directed to be excluded from the final list of comparables with regard to its software development service segment. On this issue, the Pune Bench of the Tribunal has held as follows: 16. We have perused the case records and heard the rival contentions. We observe that Thirdware Solutions Limited is functionally dissimilar and is engaged in rendering software development implementatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Co-ordinate Bench of the Tribunal, Pune in the case of M/s. John Deere India Pvt. Ltd. Cybercity Vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: 10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales‟ of ₹ 67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records `Export from SEZ units‟ ₹ 47,58,40,447/-; `Export from STPI units‟ ₹ 11,20,90,633; `Revenue from subscription‟ ₹ 1,53,13,736/-; `Sale of licence‟ ₹ 1,51,38,618/-; and `Software Services‟ ₹ 5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Revenue from subscription etc. Even the first two major items of `Exports from SEZ units‟ and `Export fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant assessment year under consideration before us at this present moment. It is therefore, natural that all parameters regarding this company would be same and respectfully, following our findings in Symantec Software India Private Limited. Vs. DCIT (supra.), we direct the TPO/AO to exclude this company i.e. Thirdware Solutions Limited from the final list of comparables. The Ld. DR submitted that there is no change in facts and circumstances in respect to the assessee and also in respect to the comparable company i.e. Thirdware Solutions Limited in the present year also. 31. Considering the identical set of facts and circumstances, we respectfully follow our findings in the above mentioned cases and direct the TPO/AO to exclude this company i.e. Thirdware Solutions Limited from the final list of comparable in respect of the assessee. Thus, Ground No.6 raised in appeal by the assessee is allowed. 32. With regard to Ground No.9, the assessee contented that the TP adjustment has to be done restricting to the proportion of transaction with Associated Enterprises only. 33. We find that the Hon‟ble Jurisdictional High Court in the case of CIT vs. Firestone Interna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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