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2015 (7) TMI 251 - ITAT DELHI

2015 (7) TMI 251 - ITAT DELHI - TMI - Transfer pricing adjustment - whether foreign exchange fluctuation should be considered as operating item while computing operating profit? - Held that:- The issue is no longer res-integra and stands decided in the case of M/s. SSP India Pvt. Ltd. 2015 (7) TMI 214 - ITAT DELHI ] wherein held that foreign exchange gain/loss should be treated as as an operating item.

Rejection of M/s. B2B Software Technologies Limited and M/s. Cressanda Solutions L .....

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to reject the same is not tenable. However, from the order of TPO, it is evident that M/s. B2B Software Technologies Ltd. was also excluded on the ground that it had also failed export filter which filter has not been challenged before us and has been accepted by the taxpayer. Thus, having regard to the above, we direct the inclusion of M/s. Cressanda Solutions Ltd. as a comparable for the purpose of determining the arm‟s length price. - Decided partly in favour of assessee.

Tat .....

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for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties - Decided in favour of assessee.

Rejection of M/s. CG VAK Software & Exports Limited from final set of comparables as not passing .....

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ain, Adv & Ms Dipika Agarwal, CA For the Respondent : Sh Judy James, Stading Counsel. DR ORDER PER A. T. VARKEY, JUDICIAL MEMBER This appeal arises from an order dated 23.12.2014 passed under section 143(3)/144C of the Act (herein after the Act‟) in pursuance to which, directions of DRP dated 14.11.2014 under section 144C(5) of the Act. 2. In this appeal, the appellant has raised the following Grounds of Appeal: 1. That the assessing officer erred on facts and in law in completing asse .....

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ion 92CA(3) of the Act. 2.1 That the DRP/TPO erred on facts and in law in not appreciating that in terms of Rule 10B(1)(e) of the Income Tax Rules, while applying Transactional Net Margin Method ( TNMM ), net profit margin (Operating profit margin) earned by the tested party from transaction undertaken with associated enterprise only is ought to be benchmarked. 2.2 That the Dispute Resolution Panel ( DRP‟) erred on facts and in law in upholding the treatment given by the TPO to consider fo .....

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l be considered as operating income/expense while computing the operating income of the appellant and comparable companies. 2.4 That the DRP erred on facts and in law in upholding filters of (i) turnover less than 5 crores and (ii) export sales less than 75% of total sales applied by the TPO, for the purpose of the benchmarking analysis applying TNMM. 2.5 That the DRP/TPO erred on facts and in law in rejecting the following comparable companies on the basis of filter of export sales less than 75 .....

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re Technologies Ltd. 4.19 Cressanda Solutions Ltd. 1.41 2.7 That the DRP/TPO erred on facts and in law in considering Tata Elxi Limited in the final set of comparable companies not appreciating that the said company not only had a very high turnover, it also does not satisfy the test of comparability laid down under Rule 10B(2) of the Income Tax Rules. 2.8 That the DRP/TPO erred on facts and in rejecting CG VAK Software & Exports Limited from the final set of comparable companies allegedly h .....

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he claim of the appellant regarding risk adjustment, holding that in absence of robust and reliable data, both for the appellant and for the comparables, risk adjustment cannot be considered for enhancing comparability. 3. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing. 3. Ground Nos. 2 to 2.10 of t .....

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, the assessee received a total consideration of ₹ 12,50,07,838/- in respect of international transaction of provision of software development services to its AE. For the purpose of benchmarking the international transaction of provision of software development services, the assessee applied Transactional Net Margin Method as the most appropriate method by considering itself as the tested party and operating profit to operating cost ratio (OP/OC) as the most appropriate Profit Level Indica .....

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companies with weighted average operating profit margin (OP/OC) of 7.83% as under: Company Name OP/TC ASM Technologies Ltd. 10.89 Ace Software Exports Ltd. 14.89 Aditya Birla Minacs Technologies Ltd. [Merged] (3.34) B2B Software Technologies Ltd. (19.05) Bells Softech Ltd. 17.22 CG-VAK Software & Exports Ltd. 2.35 CSS Technergy Ltd. 2.27 Cambridge Technology Enterprises Ltd. 12.30 Cressanda Solutions Ltd. 9.39 Cybertech Systems & Software Ltd. 65.30 Dynacons Systems & Solutions Ltd. .....

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inethra Infra Ventures Ltd. 7.88 Evoke Technologies (India) Pvt. Ltd. 20.02 Cepha Imaging Pvt. Ltd. (30.38) Compulink Systems Ltd. [Merged] (10.21) J&B Software (India) Pvt. Ltd. [Merged] (8.26) Twinstar Industries Ltd. 1.91 G-cube Webwide Software Pvt. Ltd. 16.89 Emergys Software Pvt. Ltd. 29.01 SJ Corporation Ltd. 18.89 Skava Systems Pvt. Ltd. 37.19 vMoksha Technologies Pvt. Ltd. (6.09) Vrinchi Technologies Ltd. 11.14 Average 7.83 3.3 On the basis of the aforesaid, it was submitted that si .....

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by the assessee during the instant year. The TPO after considering the submission of the assessee rejected the comparables selected by the assessee and prepared a fresh set of eight comparables and determined the PLI of the comparables at 29.45%. The list of comparables as prepared by the TPO is as under: S.No. Company Name OP/OC(%) 1. Evoke Technologies Limited 18.56% 2. CTIL Limited 18.11% 3. Sankhya Infotech 18.11% 4. Infinite Data Systems Pvt. Ltd. 88.25% 5. Persistent Systems and Solutions .....

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25 Operating profit 7,674,625 OP/OC (%) 6.54% 3.6 On the basis of the above, TPO proposed an adjustment at ₹ 2,68,83,279/- as below: Operational cost 117,344,325 Arm‟s Length Price at a Margin of 29.45% 151,902,229 Price Received 125,018,950 105% of the Price Received 131,269,898 Proposed Adjustment u/s 92CA 26,883,279 3.7 On appeal before the DRP, the DRP vide an order dated 2.12.2014 directed the TPO to exclude three comparables namely M/s. Infinite Data Systems Pvt. Ltd., M/s. Son .....

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e basis of recomputed mean margin of the comparables at 17.29%, the computation of the Arm‟s Length Price of the assessee was made as follows: Operational cost 117,344,325 Arm‟s Length Price at a Margin of 17.29% 137,633,159 Price Received 125,018,950 Proposed Adjustment u/s 92CA 12,614,209 4. We have considered rival submissions and material on record. During the course of hearing before us, the learned counsel for the assessee did not press ground no. 2.5, 2.9 and 2.10 of the Groun .....

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hereby re-computing the operating profit to cost ratio of the appellant at 6.54% as against 7.91% considered in the transfer pricing documentation. It was submitted that exchange fluctuation income/expenses is an integral part of the sales made or expense incurred by the appellant during the course of its business and accordingly should be considered as operating income/expense. It was further submitted that application of TNMM involves comparison of net profit i.e. operating profit margin, bein .....

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n of the net profit from the international transaction with that of the unrelated parties. Reference in this regard is also made to the OECD Guidelines on transfer pricing, wherein, it has been held that foreign exchange gains and losses should be included or excluded for the determination of the net profit depends on whether the foreign exchange gain or losses are of a trading nature and whether or not the tested party is responsible for them. Reliance was placed on the decision of Delhi Bench .....

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e is no longer res-integra and stands decided in the case of M/s. SSP India Pvt. Ltd. ITA No. 1309/D/2014 dated 29.5.2015 wherein too basis of the DRP on SAFE HARBOUR Rules was rejected by holding as under: 14 Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: .....

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of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import .....

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he assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordi .....

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e appellant by observing as under: The operating income/expenditure was never defined in any of the legislation so far. It was the conventional wisdom which went into the components of operating income/expenditure while calculating the operating profit. However, the position has changed since the notification of CBDT issued on 18.9.2013. This is the notification on Safe Harbour Rules‟. Rule 10TA(j)(k) and (l) define the concept of operating expense , operating revenue and operating profit .....

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on safe harbour. However, such a contention has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: 4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment ye .....

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anies were otherwise functionally comparable to the appellant. It was submitted that in the Transfer Pricing Documentation, the assessee has applied the turnover filter, wherein the companies having turnover less than 1 crore and greater than 50 crores were rejected. It was submitted that the TPO, however in the impugned order increased the threshold limit of turnover filter from 1 crore to 5 crore and further, rejected the upper threshold limit of 50 crore. It was submitted that increase in thr .....

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of potential comparable companies. It is thus prayed that the following comparable companies having turnover greater than 1 crore ought to be considered in the final set of comparable companies: S.No. Company Name Sales (in cr.) 1. B2B Software Technologies Ltd. 4.19 2. Cressanda Solutions Ltd. 1.41 6.1 Having considered the rival submissions, we find that the DRP rejected the contention of the appellant for inclusion of M/s. B2B Software Technologies Ltd. and Cressanda Solutions Ltd. as compar .....

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income can be significantly reduced because the same persons are often both major shareholders and also the key employees, thereby obliterating the economic distinction between profits and salaries.  Small companies with operating revenues less than ₹ 5 crore are excluded from comparison because they lack competitive strength, lack operational efficiencies and also lack human resources,  In the case of M/s Haworth India (supra) the ITAT, Delhi has impliedly approved this fi .....

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nover for the purpose of a selection of comparable when the assessee which has been adopted as a tested party has a turnover of ₹ 12.50 crores. Once, there is no dispute that two companies selected by the company though having turnover less than 5 crores are functionally comparable with the assessee, the basis adopted to reject the same is not tenable. However, from the order of TPO, it is evident that M/s. B2B Software Technologies Ltd. was also excluded on the ground that it had also fai .....

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pite the fact that it did not satisfy the test of comparability laid down under Rule 10B(2) of the Rules. The TPO in respect of the aforesaid comparables held that all the activities of M/s. Tata Elxsi Limited are part of software development industry and therefore, distinction claimed by the taxpayer is incorrect. The DRP rejected the contention of the appellant that it is functionally different by concluding that the company provides software development services which are quite similar to the .....

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he case of Agnity India Technologies Pvt. Ltd. vs. ITO (ITA No. 3856/Del/2010) and it was submitted that the appeal preferred by the revenue against the exclusion of M/s. Infosys Technologies Ltd. has been dismissed by the Hon‟ble High Court. It was further submitted that the said company is engaged in product design services, innovation design engineering services and visual computing labs. It was submitted that the company is engaged in specialized and niche domain of software products/s .....

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oresaid company itself acknowledges that it is a specialized embedded software development service provider, hence, cannot be compared with any other software development company. The company also informed, because of specialization and diverse nature of its business, it is very difficult to scale up its operations. Considering the aforesaid factual aspects, coordinate benches of this Tribunal, including the Hyderabad Benches, in the decisions cited by ld. AR have held this company not to be a c .....

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2011), wherein the Hon‟ble Tribunal held as under: 7.7 Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6 .....

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idered as comparable for the purpose of benchmarking international transaction of the assessee. 8. Ground No. 2.8 of the Grounds of Appeal relates to the rejection of M/s. CG VAK Software & Exports Limited from final set of comparables by holding that such company is not passing the filter of employee cost to total cost less than 25%. 8.1 Having considered the rival submissions, we find that this issue has been considered by the Hyderabad Bench of the Tribunal in the case of Kenexa Technolog .....

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satisfied. In this regard our attention was drawn to page 818 to 824 of the assessee‟s paper book wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, he cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services Rs. Cost of services - Overseas 2,77,32,337 Cost of services - Domestic 2,58,40,435 Transcrip .....

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