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TMI Blog2024 (7) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... rex gains are to be treated as part of operating income only. The corresponding grounds raised by the assessee stand allowed to that extent. Comparable Entities under IT segment - M/s Thirdware Solutions Ltd. seeked to be excluded by assessee on functional difference whereas Ld. CIT-DR submits that this entity is having similar functional profile - To support the submissions assessee relies on published Annual Statements whereas Ld. CIT-DR has brought on record the assessment details and other financial statements of this entity. To ensure fair adjudication of this entity and to bring correct facts on record, the bench deems it fit to remit the issue of exclusion / inclusion of this comparable entity to the file of Ld. AO / TPO with a direction to the assessee to substantiate its case - ground raised by the assessee stand allowed for statistical purposes. Akshay Software Technologies Ltd. - We find that the observation made by Ld. TPO, as rightly pointed out by Ld. AR, are erroneous. The observations have been made in the Annual Report not with respect to the assessee but with respect to another entity. This entity meets filters applied by TPO while carrying out comparable analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 01.04.2008 which were claimed to be mere reimbursement in nature - HELD THAT:- Having considered earlier direction of Tribunal and to enable revenue take consistent stand in the matter, this issue stand restored back to the file of Ld. AO on similar lines. - HON BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON BLE SHRI MANOJ KUMAR AGGARWAL, AM For the Assessee : S/Shri Sriram Seshadri Ashik Shah (CA) Ld. ARs For the Revenue : Dr. S. Palani Kumar (CIT) / Shri A. Sasi Kumar (CIT) - Ld. CIT-DRs ORDER Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2014- 15 arises out of final assessment order dated 13-08-2018 passed by Ld. Deputy Commissioner of Income Tax, Corporate Range-3, Chennai (AO) u/s 143(3) r.w.s. 92CA / 144C(13) of the Act pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (DRP) u/s 144C(5) of the Act dated 30-07-2018. The assessee carried out certain international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm s Length Price (ALP) before Ld. Transfer Pricing Officer-3, Chennai (TPO) vide order dated 31-10-2017. Incorporating the proposed ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Double Taxation Avoidance Agreement ('DTAA') between India and USA. 8. The lower authorities, in facts and circumstances of the case and in law, erred in holding that the payments made by the Appellant to GTE-Overseas, constitutes income chargeable to tax under the Act read with the provisions of the Double Taxation Avoidance Agreement ('DTAA') between India and USA. Disallowance of provision for lease equalization reserve: 9. The lower authorities, in the facts and circumstances of the case and in law, erred in disallowing the claim of deduction of lease equalization reserve in computing the Appellant's taxable income. 10. The lower authorities, in the facts and circumstances of the case and in law, erred in holding that the provision for lease equalization reserve is subject to withholding provisions under the Act. II. Transfer Pricing General Ground: 11. The lower authorities have, in the facts and circumstances of the case, erred in finalizing their orders with unwarranted adjustments to the reported income of the Appellant by misapplying the provisions of the Act, by adopting faulty assessment procedure to finalize the adjustment, such as but not limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed by the Appellant in computing its ALP. 2.1 Ground No. 1 and 11 is general in nature. No arguments have been made in support of ground Nos. 2 18. Ground Nos.9 10 has not been pressed before us. It has been submitted that ground nos. 3 to 8 relating to disallowance u/s 40(a)(i) may be remitted back as per order in earlier years. The Ld. AR advanced arguments on ground numbers 12 13 to submit the forex gains are to be treated as operating item since forex losses have been treated as operating losses. The Ld. AR placed on record a chart to support exclusion / inclusion of comparable entities and made arguments on ground nos. 14 to 17. 2.2 The Ld. CIT-DR, on the other hand, submitted that forex gains could not be considered as operating in nature. The Ld. CIT-DR vehemently contested the arguments of Ld. AR with respect to comparable entities. In support of arguments, the assessment order of one comparable entity i.e., M/s Thirdware Solutions Ltd. has been placed on record. The written submissions have also been filed by both the sides which have duly been considered while adjudicating the appeal. The rival arguments, as considered relevant, have appropriately been dealt with at ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of export of services and therefore, the same are to be considered as operating in nature. Simply because the same have been shown as other incomes would not materially alter this position. This policy is stated to be consistently followed by the assessee in earlier years. The assessee submitted that similar treatment was affected for computing margins of comparable entities. 4.4 However, Ld. TPO held that the assessee was operating on a cost-plus model. As per as per inter-company agreement, costs inter- alia includes forex losses but do not include forex gains as negative costs. If the gains are reduced from costs, it calls for an adjustment since the same has given unintended benefits to the assessee in terms of more margins on reduced cost base. The assessee failed to account for as to how the forex gains have been adjusted while raining invoices every month. Therefore, the gains could not be considered as operating revenue. Further, the gains were in no way connected to the compensation for the services rendered to the AE but it was only an appreciation post realization of receivable. The costs would form part of the operating cost as per the definition of operating cost as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the treatment of forex Gains is concerned, it is undisputed fact that forex losses have been considered as operational losses. In our considered opinion, such gains / losses form part of routine business operations of export of services and inextricably linked to routine transactions of export of services. Therefore, the consequential losses as well as gains are to be given the same treatment. The Ld. TPO has treated forex losses as operating costs but has held that forex gains would be non-operating in nature. The Ld. DRP, considering safe harbor rules, held that forex losses as well as gains would stand excluded while computing operating income. However, the forex losses have still been considered as operating cost and no directions have been given by Ld. DRP in this regard. The same could not be held to be justified since both items, being of similar nature, are to be given same treatment. In earlier years also, similar treatment has been given by the assessee and the same has been accepted by revenue. Similar treatment has been given while computing margins of comparable entities. Another fact is that as per inter-company agreement, costs include forex losses. Therefore, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT-DR, on the other hand, placed on record, assessment details of this entity in support of the submission that this entity was primarily into software services sector. It has earned software services revenue. The perusal of Tax Audit Report of this entity would also support the fact that this entity was engaged in service sector. Thus, this entity was engaged in software development, implementation and support services which are similar to services being rendered by the assessee. The Ld. CT-DR sought distinction in the case law of Kony Services Pvt. Ltd. (supra) and submitted that the observations made therein run contrary to audited financial statements of this entity. The Ld. CIT-DR also averred that necessary segmental results are also available for this entity. The Ld. AR controverted the arguments of Ld. CIT-DR and submitted that the aforesaid data as furnished by Ld. CIT-DR was not available in public domain. The Audited final statements as obtained from official MCA website ought to take precedent over the date furnished by Ld. CIT-DR. 7.3 Having considered rival submissions, the bench finds substance in the arguments of both the sides. The assessee seeks exclusion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity meets filters applied by Ld. TPO while carrying out comparable analysis. In the cited decision of Bangalore Tribunal in Mercedes-Benz Research Development India (P.) Ltd. (supra), this entity has been accepted to be a comparable entity. Therefore, we direct Ld. TPO to accept this entity as comparable entity. The corresponding grounds raised by the assessee stand allowed. 9. Comparable entities under ITeS Segment In this segment, the assessee seeks exclusion of comparable entities viz. M/s Infosys BPO Ltd. M/s BNR Udyog Limited. The assessee also seeks inclusion of M/s Informed Technologies India Ltd. M/s Ace BPO Services Pvt. Ltd. 10. M/s Infosys BPO Ltd. 10.1 The assessee sought exclusion of this entity on argument of economies of scale and high turnover. However, the same was rejected by Ld. TPO and confirmed by Ld. DRP against which the assessee is in further appeal before us. 10.2 . The Ld. AR sought exclusion of this entity on the ground of functional dissimilarity. It was submitted that this entity was engaged in diversified activities and provide business process management services. Further, this entity has different business model and has high turnover. This entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S segment which is evident from disclosures made in the Annual Report. Reliance has been placed on the decision of Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (108 Taxmann.com 306) to support the arguments. The Ld. CIT-DR submitted that this entity was functionally different. 12.3 We find that this entity has been held to be a comparable entity under ITeS segment by Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (supra). As per Directors Report (Page No.1210 of paper book), this entity is operating as IT enabled Service provider and is a leading content provider to the securities and financial research industry. Its entire revenue is out of revenue information technology services (Page 1299 of the paper book). These functions are similar to assessee s functions. Therefore, we direct for inclusion of this entity. 13. M/s Ace BPO services Ltd. 13.1 The Ld. TPO excluded this entity on the ground that current year data was not available. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 13.2 The Ld. AR submitted that Annual Report of this entity is very much available and the same was furnished before Ld. DRP. It has further ..... X X X X Extracts X X X X X X X X Extracts X X X X
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