2016 (4) TMI 1223 - AT - Income Tax

TPA - whether the foreign exchange gain or loss should be considered as operating revenue / operating cost of the assessee or not? - Held that - The issue is squarely covered in favour of the assessee in view of the decision in Principal CIT Vs. Fiserve India Pvt. Ltd. 2016 (1) TMI 1276 - DELHI HIGH COURT wherein as directed to treat the foreign exchange gain/ loss as an operating item. Thus hold that foreign exchange fluctuation gain earned by the assessee is operating income and therefore ld. TPO/AO is directed to adjust the margin of the assessee treating foreign exchange gain as operating income of the assessee for determining PLI for comparability analysis. Working capital adjustments - Held that - As submitted before us that ld. TPO has considered incorrect margins as the ld. TPO has taken figures from the data base (prowess) and not from the actual balance sheets of the comparable company. A chart is also submitted before us showing error in the calculation wherein in case of each and every comparable there are certain errors pointed out. As the submission made by the assessee is not possible for verification at this stage therefore we set aside this issue to the file of ld AO for verification of the claim made by the assessee and correct the figures accordingly and then grant working capital adjustment to the assessee. Selection to the comparable of Goldstone Technology Ltd - Held that - Markets in the IS and the India were fundamentally different and that the results of the Indian segment of the US operations of Goldstone Technologies constituted an inappropriate a comparable cannot be said to be perverse. The basis of allocation of costs and therefore the working of the profits was also not clear is another aspect on which the court is unable to hold that the conclusion is perverse. Disallowance u/s 14A read with Rule 8D (2) - Held that - Recording of satisfaction on the correctness of claim of the assessee on disallowance u/s 14A before invoking rule 8 D of the Income tax rules 1962 is mandatory. The language of section 14A provides that AO must record a satisfaction if he was unsatisfied with any incorrect claim of the assessee including non-disallowance. If he failed to record such a finding then it cannot be said that he rightly invoked provision of section 14A of the act for application of rule 8D. Thus we direct LD AO to delete the disallowance of Rs. 237585/- u/s 14A of the Act. See I.P. Support Services India (P) Ltd vs. CIT 2015 (10) TMI 752 - DELHI HIGH COURT Rectification of mistake - Held that - As perused the chart of working capital adjustment submitted before us wherein may corrections with respect to each of the comparables have been pointed out by the ld DR. we have also perused the ground No.2.1 as well as ground No.2.2 of the appeal wherein certain errors are pointed out. Surprisingly when passing the order pursuant to order of ld. DRP if it results in to enhancement in adjustment and not reduction therein Ld. TPO should have granted an opportunity to verify the correctness of the computation as a principle of natural justice. Therefore in the interest of justice we set aside ground No.2 of the appeal on Transfer Pricing issues back to the file of ld. TPO with a direction to verify the computation of margins pointed out by LD AR and then correct them for computation of arms length pricing of the international transaction.

Summary

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C.
2. Transfer pricing adjustments related to software development services.
3. Disallowance under Section 14A of the Income Tax Act.
4. Levy of interest under Sections 234B and 234C.
5. Rectification under Section 154 of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment framed by the Assessing Officer (AO) based on the Dispute Resolution Panel (DRP) directions was "bad in law, violative of principles of natural justice and void ab-initio." However, these general grounds were dismissed as they were deemed too broad and not specific.

2. Transfer Pricing Adjustments:
The core issue was the adjustment of Rs. 6,07,72,255/- made by the TPO/DRP concerning software development services provided by the assessee to its Associated Enterprises (AEs). The TPO initially proposed an adjustment of Rs. 85,38,5449/-, which was later revised to Rs. 6,07,72,255/- after DRP's directions.

Key Contentions and Findings:
- Foreign Exchange Gain/Loss: The assessee argued that foreign exchange gains should be considered as operating income. This contention was upheld, referencing the Delhi High Court's decision in Principal CIT Vs. Agilis Information Technologies International Pvt. Ltd., which treated foreign exchange fluctuations as operating income/expenses.
- Working Capital Adjustment: The assessee contended that the TPO should use figures from the balance sheets of comparable companies rather than the 'prowess' database. The Tribunal directed the AO to verify and correct the figures based on balance sheets.
- Exclusion of Goldstone Technologies Ltd.: The Tribunal excluded this comparable, citing the Delhi High Court's decision in Principal CIT Vs. Pitney Bowes Software India Pvt. Ltd., which found the comparable inappropriate due to unclear cost allocation and segmental results.

3. Disallowance under Section 14A:
The AO disallowed Rs. 2,37,585/- under Section 14A, which was 0.5% of the average investment value. The Tribunal noted that the AO did not record dissatisfaction with the assessee's claim that no expenditure was incurred for earning exempt income. Citing the Delhi High Court's decisions in I.P. Support Services India (P) Ltd vs. CIT and Maxopp Investment (P) Ltd. vs. CIT, the Tribunal directed the AO to delete the disallowance, emphasizing the necessity of recording dissatisfaction before invoking Rule 8D.

4. Levy of Interest under Sections 234B and 234C:
The assessee's appeal against the levy of interest under Sections 234B and 234C was dismissed as these were consequential in nature.

5. Rectification under Section 154:
The assessee appealed against the rectification order under Section 154, which enhanced the adjustment to Rs. 6,38,63,214/-. The Tribunal found that the TPO had used incorrect profit margins and working capital adjustments from the 'prowess' database instead of annual reports. The Tribunal set aside the issue, directing the TPO to verify and correct the computations, ensuring proper opportunity for the assessee to present information.

Conclusion:
The appeal was partly allowed, with specific directions for the AO/TPO to:
- Treat foreign exchange gains as operating income.
- Verify and correct working capital adjustments based on balance sheets.
- Exclude Goldstone Technologies Ltd. as a comparable.
- Delete the disallowance under Section 14A due to lack of recorded dissatisfaction.
- Recompute margins and working capital adjustments correctly in the rectification proceedings.