2017 (3) TMI 267 - ITAT MUMBAI

TPA - determining the net profit margin - whether all operating expenses should be taken into account and once any item is appearing as an operating cost which is taken into determining the PLI, then there cannot be any reason to exclude any part of the cost subsequently in the garb of making comparability adjustment? - Held that:- We are unable to fully subscribe to such proposition above because, even if an item is taken as an operating cost, however the rule as enshrined under 10B (1)(e)(iii) and 10B(3) clearly contemplates that any difference or abnormality or any extraordinary item which materially affects the cost base or profit, the same needs to be adjusted so as to eliminate the material effect of such difference. Because, the whole spirit of the transfer pricing exercise is to determine the appropriate arms length price. Such an adjustment definitely warrants at times the tinkering of PLI in the exercise of determination of arms length price. If any peculiar abnormality or extraordinary event which has arisen specific in the case of the ‘tested party’ then same needs to be analysed, firstly, by comparing it with uncontrolled transactions with independent entity; and secondly, if such peculiarity is not found in the case of the uncontrolled comparable transactions then the rule envisages that reasonable accurate adjustment should be made which materially affects the cost or profit. Hence, the contention put forth by Ld. CIT DR in our humble opinion is not acceptable.

Whether Forex loss is to be reckoned as operating cost or not? - Held that:- As in this case as stated earlier it has not been brought on record that such kind of an exposure of hedging loss on cancellation of forward contracts is there in every comparable uncontrolled transaction, that is, in the case of the other comparables. Risk assumed by the assessee as well as by the comparable entity may be similar but quantum and scale of a risk factor if undermines the computation of PLI of the assessee vis-à-vis the comparables, then our rules under the Indian Transfer Pricing provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable uncontrolled transaction needs to be eliminated by making suitable adjustments. Here in this case, a material difference has arisen in the case of the assessee due to abnormal feature which is qua the assessee in this particular year, (which is abnormal loss on cancellation of forward contract) which admittedly is absent in the cases of comparables with whom the assessee’s transaction is being bench marked, therefore, a suitable adjustment has to be made to factor in the material difference in the PLI. Thus, in our opinion, the loss amounting to ₹ 2,22,52,786/- on account of cancellation of forward contracts out of total forex loss of ₹ 3,41,44,774/- needs to be eliminated from the operating cost and this adjustment is proposed to be made in the case of the assessee which is the tested party. We accordingly direct the TPO/AO to make the adjustment of this amount in the operating cost and rework the PLI.

Selection of comparables - Held that:- Assessee company cannot be regarded as low end ITES service provider because engagement of qualified and professional lawyers for providing legal outsourcing services is definitely high end services