2015 (8) TMI 652 - AT - Income Tax

Transfer pricing adjustment - inclusion/exclusion of certain companies in/from the list of comparables - Held that:- Cosmic Global Ltd. (Seg.) - the functional comparability of the Accounts BPO segment of Cosmic Global has been accepted by the ld. AR. In that view of the matter and respectfully following the judgment of the Hon’ble High Court in the case of ChrysCapital Investment Advisors (I) Pvt. Ltd. (2015 (4) TMI 949 - DELHI HIGH COURT), we hold that Cosmic Global Ltd. (Seg.) cannot be excluded from the list of comparables.

CG-VAK Software and Exports Ltd. (Seg.) - The quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We have noticed above the judgment of the Hon’ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in which it has been held that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for the purposes of determination of the operating profit margin etc.

Accentia Technologies Ltd. - apart from rendering IT enabled services, this company is also having software products and the revenue from both these streams has been merged. As the segmental figures in relation to the business of rendering ITES are not available and the TPO has taken its entity level figures, it ceases to be comparable. The obvious reason for the exclusion of this company is the pooling of income from software products in its overall profitability, which cannot be separated with precision, thereby rendering it incomparable. We, therefore, direct to remove this company from the list of comparables.

e- Clerx Services Ltd.is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmations and settlements etc. It also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd., it is manifest that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services Ltd. cannot be considered as comparable.

R. Systems International Ltd. (Seg.) - It is clarified that only if the assessee succeeds in providing the relevant data of this company for the concerned financial year on the basis of the information available from the Annual reports only, the TPO should include this company in the list of comparables by considering its OP/TC on the basis of the financial year ending 31.3.2009. If however, even though its quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then this company should not be considered as comparable.

Treating foreign exchange difference as non-operating as against the assessee’s treatment of operating cost - Held that:- In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2010 (8) TMI 676 - ITAT, BANGALORE ) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011 (6) TMI 392 - ITAT BANGALORE ). Thus we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee’s claim of operating cost.

No separate adjustment was called for under the head interest as interest on receivables was subsumed in the working capital adjustment allowed as directed by DRP - Held that:- TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction to transaction basis. To put it differently, suppose an invoice is raised on 1st May; period allowed for realization is two months; and the invoice is actually realized on 31st December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at the end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. We, therefore, reject the reasoning given by the DRP in deleting the addition. However, in view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, we hold that the charging of interest on receivables is not sustainable on the extant facts.