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2020 (9) TMI 918 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT:- Assessee is a captive service entity engaged in rendering marketing support and general administrative support services (as technical support services) and software development services to its overseas AEs , thus companies functionally dissimilar with that of assessee need to be deselected from final list. Companies with high turnover need to be excluded. Amortization of goodwill - whether expenditure/amortization of goodwill is not part of segmental operating cost? - HELD THAT:- Assessee should have allocated the unallocated expenses in the ratio of 85.15 : 14.85 between the segments (which is the ratio of operating revenue). In the given case the amortisation of goodwill is not an operating expenses, it should be allocated based on the segmental revenue between the segments and accordingly we are directing the TPO to allocate 14.85% of the amortized value of goodwill for this year to the software and Development Services Segment. In order to carry out the TP study, it is relevant to determine the operating margin of the segment before it can be compared with other comparative companies. The assessee has arrived the margin of the R&D segment at 12% by allocating the unallocated expenses without proper basis. When we allocate the unallocated expenses in the operating revenue basis, we will know the exact operating profit from the segment and then the TP analysis can be carried out based on the updated segment results. Accordingly, we are directing AO/TPO to calculate the updated segment results and do TP adjustment. Accordingly, the ground raised by the assessee is partly allowed. Foreign exchange fluctuation - difference in the exchange rate on the date of raising of invoices and exchange rate on the date of realization of invoice - assessee submitted that it used to raise the invoices for services rendered in USD equivalent to Indian rupees recorded in its books of accounts - HELD THAT:- Forex loss reported by the assessee in segment reporting as operating expenditure and since assessee has surrendered the same in income tax computation, the same has to be eliminated from the operating expenses. We are in agreement with the submission of the Ld. AR that this reversal of expenditure will have a direct impact on operating expenses declared by the assessee. When the AO accepts the segment reporting reported by the assessee and forex loss as part of operating expenses, the same expenses were surrendered by the assessee as non-deductible expenses then, this expenses should also be removed from the operating expenses in the segment statement. Accordingly, we direct TPO to eliminate the forex loss declared by the assessee as operating expenses and rework the operating profit of the R&D segment. Since the assessee has declared ₹ 71.18 lakhs as Forex loss for this segment and we noticed that assessee has declared the loss voluntarily, we direct TPO to remove the forex loss from the calculation and then rework the operating profit of the segment and do the TP adjustment accordingly.
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