TMI Blog2015 (11) TMI 1651X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA no. 1066/Del/2015 - - - Dated:- 4-11-2015 - SHRI S.V. MEHROTRA ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER Appellant by : Sh. S.D. Kapila Adv. Shri R.R. Maurya Adv. Respondent by : Sh. Syed Nasir Ali CIT (DR) O R D E R PER S.V. MEHROTRA, A.M..: This appeal has been preferred by the revenue against the assessment order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 state of art facilities locat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method with assessee as the tested party and percentage of operational profit/ operational cost as profit 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed as not pressed. Ground no. 15 is premature and, therefore, does not require any adjudication. 10. Apropos ground no. 5, ld. counsel submitted that turnover filter of ₹ 5 crore applied by TPO as against ₹ 1 crore applied by assessee, for inclusion/ exclusion of any comparable, is not correct in view of the decision of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. Vs. DCIT (2015) 277 CTR 137 (Del), wherein it has been held that mere fact that entity makes high/ extremelyhigh profits/ losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP; in such circumstances, an enquiry under rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated; unless such differences cannot be eliminated, the entity should be included as a comparable. Accordingly, ld. counsel submitted that high turnover or low turnover cannot be the basis for accepting/ rejecting any comparable. 11. We have heard both the parties. We are of the opinion that in view of the decision of Hon ble Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that essentially assessee is aggrieved by the inclusion of following comparables: i. Accentia Technologies Ltd. ii. I-gate Global Ltd. iii. Infosys BPO Ltd. iv. TCS E-serve International Ltd. v. TCS E-Serve Ltd. 16. As regards Accentia Technologies Ltd., ld. counsel referred to pages 350 351 of the PB-II, wherein the annual report of this company is contained. He pointed out that in the year under consideration Asscent Infoserve Ltd. amalgamated with this company w.e.f. 1-4-2008. He pointed out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accential Technologies Ltd. in serving the end to end results. Thus, functionally amalgamating company and amalgamated companies were different as performing different functions. 17. The effect of amalgamation has been pointed out in the annual accounts and it is merely stated therein that in view of the amalgamation being effective the figures for the year ended 31-3-2010 were inclusive of the figures relating to the amalgamating company and, thus, were not comparable with those of the previous year. 18. Ld. counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of Techbook International Pvt. Ltd. (supra), has observed as under: Succinctly, the assessee was incorporated as a wholly owned subsidiary of Aptarausa. It is engaged in the development of customized electronic data. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy/ electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said that the assessee is primarily engaged in providing ITES to its associated enterprise (AE). 20. The assessee s business profile has been considered in para 2 of this order and a comparison of the business profile of Techbook International Pvt. Ltd. (supra) with assessee clearly shows that both are providing ITES services to its AEs. Therefore, the finding in Techbook International Pvt. Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centre management activities. 23. Ld. counsel referred to page 467 and pointed out that in the notes forming part of the financial statements, it has been observed as under: Segment information: Consequent to reorganization of its global organization with the objective of making industry practice its focal point for performance evaluation and internal financial report and decision making, the Company has reviewed and revised the manner in which it views the business risks and returns and monitors its operations. Accordingly, as required under Accounting Standard 17 Segment Reporting (AS-17), the format of reporting primary segment information has been changed to Business Segments and secondary segment information has been changed to geography. The Company is engaged in business process outsourcing (transaction processing) services to the Banking financial services industry (BFSI) and Travel, Tourism and Hospitality (TTH), which are considered as industry segment. Geographic segments of the company are Americas, Europe and others. 24. He, therefore, submitted that no segment has been recognized for technical services though assessee was rendering technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Technical services' to its AE involving software testing, verification and validation of software, which are akin to software maintenance services falling, within the overall category of software development services. The TPO has taken entity level figures of TCS E-Serve International Ltd. for comparison, There is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature or software developn1ent, absent in the assessee's case). In the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of 'Transaction processing services'. As such, the entity level figures render this company as unfit for comparison. Ergo, we order for the removal of this company from the final set ofcomparables. 25. Ld. counsel submitted that in view of above submissions, this comparable has to be excluded. 26. Having heard both the parties, we are of the considered opinion that since assessee company is providing non-develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed as under: 10.3.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 466 of the paper book. The company's overview has been discussed on page 467 of the paper book, which divulges that this company : is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services. We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd. this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The Id.AR argued that the nature of the ITES provided by this company is different from that of the assessee and hence the same be excluded. We are disinclined to sustain this objection. Matching of the exact fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher turnover, finally found the status of a comparable with a captive company providing ITES to its AE alone. 10.3.4. Coming back to the facts of our case, we find that since TCS e- Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/ turnover have been brought to our notice. Consequently, we hold that the authorities were justified in including this company in the list of comparables . 31. However, the main contention of ld. counsel for the assessee is that the assessee in Techbook International Pvt. Ltd. (supra), did not bring to the notice of the Tribunal, certain business characteristics, which were reported in the annual report of Tata e-Serve Ltd. for F.Y. 2009-10. Therefore, the matter is restored back to the file of AO to examine the assessee s contention in the light of observations of the ITAT in the case of Techbook International Pvt. Ltd. (supra), while considering the TCS e-Serve International Ltd. We order accordingly. 32. i-Gate Global Solutions:- In the case of Techbook International Pvt. Ltd. (supra), the Tribunal has excluded this company from the list of comparables by observin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He observed that the sales from the ITES segment was less than 5 crores, therefore, this company could not be considered as a suitable comparable. 38. We have heard rival contentions and perused the relevant material available on record. While deciding ground no. 5, we have held that in view of the decision of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. (supra), high or low turnover cannot be the criteria for acceptance/ rejection of any comparable. Ld. TPO has not disputed that this comparable is carrying on the same functions as that of assessee. Further, we find that this comparable has been accepted by the ITAT in the case of Techbook International Pvt. Ltd. (supra), observing as under: 12.2.2. Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The Id. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such . circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that its turnover is less. The reasons given above while considering the comparability of CG- VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables. However, the TPO is directed to verify the correctness of OP/OC of this company before its inclusion in the set of comparables. 42. In view of above discussion, we direct ld. TPO to include this company in the set of comparable. 43. As regards exclusion of Informed Technologies Ltd., ld. counsel did not dispute the same. 44. In view of above discussion, ground nos. 9 10 stand partly allowed for statistical puroses. 45. Ground no. 12: Brief facts of the case are that ld. TPO did not consider the foreign exchange gain/ loss as operating income/loss, following the decision in the case of M/s DHL Express (India) Ltd. (ITA no. 7360/Mum/2010), wherein it was held that forex gain/loss was nonoperating income/loss and needed to be excluded for the purpose of benchmarking international transaction under TNMM. He, therefore, excluded forex gain/ loss operating cost/ income of the tested party as well as comparables while calculating PLI for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the Assessee. As compared to tile Assessee the comparable selected by the learned TPO undertakes foreign exchange risk and the price charged by such comparables for undertaking such risk is in built in the sales remuneration model. Therefore, by treating foreign exchange gain or loss as a non-operating item, the comparability terms and conditions of business of the Assessee is not aligned to the comparables. Thus, in order to make a suitable comparison of the margin earned by the Assessee vis-a-vis that of the comparable companies, either of the following approaches needs to be followed: Consider foreign exchange gain or loss as operating item and benchmark the net margin earned by the Assessee with that of the comparables; or Consider foreign exchange gain or loss as non-operating item and provide the Assessee a benefit of risk adjustment on account of not undertaking any risk on account of foreign exchange movement. This adjustment is required to adjust the profit downwards of the comparable companies which have an inbuilt premium of foreign exchange risk in the sales revenue due to which their profit margins are higher than that of the comparable companies. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions in the cases of : - Woodward Governor s 312 ITR 254 (SC); - CIT Vs. Priyanka Gems 367 ITR 575 (Guj); - Cordys R D (India) (P) Ltd. Vs. DCIT (2014) 43 Taxmann.com 64 (Hyd. Trib) wherein the Tribunal has, inter alia, observed that the foreign exchange fluctuation gains is nothing but an integral part of the sale proceeds of an assessee, carrying on export business and, therefore, it could not be excluded from the computation of the operating margin of the assessee company. 54. Ld. CIT(DR) relied on the TPO s order. 55. We have considered the rival submissions and have perused the record of the case. We find considerable force in the submission of ld. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nificantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR, which is applicable to loans in Indian rupee. The PLR, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR is not applicable to loans to be repaid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. - Cotton Natureals (I) (P) Ltd. Vs. CIT (2015) 169 TTJ (Del) 685 (P) Ltd. VS. CIT (2015) 169 TTJ (Del) 685 affirmed. 58. Therefore, interest has to be determined as per US currency and not as per the prime lending rate, as applied b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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