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2020 (3) TMI 331 - AT - Income TaxTP Adjustment - ALP of a `specified domestic transaction’ - AO made a reference for determination of the ALP of `specified domestic transaction’ whereas the TPO determined ALP of the `international transaction’ - HELD THAT:- The case of the assessee is founded on the premise that the correct value of the SDT to be reported in Column no. 9 of Form No. 3CEB was ₹ 2,60,04,296/-, which was wrongly reported in Column no. 8 and vice versa. We do not understand any raison d’etre for the assessee in reporting, at all, the correct value of the transactions of the nature prescribed in section 92BA in the first instance, when it did not cross the threshold of ₹ 5.00 crore, so as to become SDT. The fact that such transactions did not become SDT and required no reporting in Form No. 3CEB coupled with the fact that the assessee still reported it and that too, in a wrong column, gives some strength to the view point canvassed by the ld. DR that the assessee wanted to mislead the Revenue by resorting to the tactic with the ulterior motive. In the ultimate analysis, we hold that no infirmity can be found in the TPO’s action in determining the ALP of the `international transaction’ of ₹ 7.07 crore. Treatment of foreign exchange (forex) gain/loss given by the authorities as an item of non-operating nature in the computation of the ALP of the assessee as well as comparables - Notes forming part of the Accounts of the assessee for the year under consideration that one of the transactions involving fluctuation in foreign currency is in the capital field, which is, `Purchase of capital goods worth ₹ 13,85,590/-.’ Forex gain/loss in respect of such a transaction cannot be considered as a part of operating expense/income. The ld. AR candidly admitted that the TPO considered forex gain/loss as non-operating not only for the assessee but also for the comparables. In view of the foregoing discussion, 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 for the assessee as well as the comparables. Comparability of companies - HELD THAT:- Refracting to functions carried out by the assessee as that of providing Software Development and Support services in the areas of embedded multimedia, multimedia applications and communication systems as per the requirements of its AEs companies functionally dissimilar with that of assessee need to be deselected from final list. One needs to examine the comparability position on year to year basis independently. For one year, a company may be comparable and for the next year, it may cease to be so for a variety of reasons. Turnover filter - Upper turnover filter is fixed at ₹ 250 crores and lower turnover filter is fixed at ₹ 2.50 crore - Companies which do not pass turnover filter approved by the DRP need to be excluded. Computation of OP/OC of comparable company - treatment given by the authorities below to the Provision for bad and doubtful debts as non-operating - The provision for doubtful debts has a direct relation with the sales made by a company. In the same way in which the amount of sales is an item of operating revenue, the amount of provision for doubtful debts, having direct link with the sales, is also an item of operating expense. In our considered opinion, Provision for doubtful debts cannot be treated as a non-operating expense. We, therefore, direct to include the amount of Provision for doubtful debts in the expense side of this company for calculating the profit margin. Direct to include Reserve for doubtful debts as an item of operating expenses in calculating the operating profit margin of the company. Operating expenses exclusion for calculating the profit margin in the process of determination of the ALP - Once a particular expenditure itself is disallowed, there can be no question of including it in the Operating expenses for calculating the profit margin in the process of determination of the ALP.While upholding the disallowance, we direct to exclude ₹ 5.00 lakh from the Operating expenses of the assessee for the purpose of calculation of its ALP.
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