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2016 (1) TMI 598 - ITAT DELHI

2016 (1) TMI 598 - ITAT DELHI - TMI - Treatment of foreign exchange fluctuation gain/loss as operating item - Held that:- We direct the AO/TPO to treat the foreign exchange gain/loss as an operating item.

Adding back transfer pricing adjustment to income assessed under Section 115JB (MAT) - Held that:- In the present case there is no allegation in the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Pa .....

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irected to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act. - ITA No.64/Del./2015 - Dated:- 23-9-2015 - SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER For The Assessee : Shri Sachit Jolly, Rahul Satija and Gautam Swarup, Advocates For The Revenue : Shri Amrendra Kumar, CIT DR Ms. Y. Kakkar, Senior DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal, at the instance of the assessee is .....

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1 (the Act ) inasmuch that the AO failed to pass the said Order in conformity with the binding and mandatory directions issued by the Dispute Resolution Panel ( DRP ) and consequently the Order is non-est, illegal and bad in law. 2. That the AO and Transfer Pricing Officer ( TPO ) erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section 144C(13) of the Act by not allowing working capital adjustment as directed to be all .....

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ejudice, the directions issued by the DRP are in respect of the comparables chosen by the TPO, therefore there was no burden on the Appellant to file any details before the TPO. 4. That on facts and circumstances of the case and in law, the AO erred in assessing the total income of the Appellant at ₹ 1,18,99,028/- as against NIL income returned by the Appellant after making transfer pricing addition of ₹ 1,18,93,486/- in respect of international transaction of software development Se .....

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the classes of adjustments provided in that Explanation. 6. That on facts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm s length price in respect of international transaction entered into by the Appellant with its AE using the most appropriate method (i.e. the Transactional Net Margin Method), maintained all the information a .....

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e basis of conjectures and surmises. 8. That the AO and DRP erred in confirming the order passed by the TPO without appreciating that the TPO erred in rejecting the functional filters applied by the Appellant in its TP Study. 9. That on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters: a) Use of only current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of compa .....

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s without appreciating that companies with any related party transactions should have been excluded or else companies with RPT of more than 10-15% to sales should have been excluded; f) Rejecting companies with employee cost less than 25% of total cost for the period under consideration; g) Rejecting companies with diminishing revenue/ persistent losses in complete contradiction of the filter of single year data applied by the TPO himself; h) Rejecting companies with different financial year end .....

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urnover of more than ₹ 200 crores, the company failed the TPO s own filter of extraordinary event during the year, i.e., awarding of a fixed contract in lieu of acquisition by Wipro Ltd. and had significant RPT during the year under consideration. 12. That the TPO and the DRP erred in retaining Wipro Technology Services Ltd. as a comparable without appreciating that signed accounts of the Company were not available in the public domain and inspite of the specific directions of the DRP, the .....

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the TPO erred on facts and in law in including Persistent Systems Limited as a comparable company without appreciating that (i) the company was functionally dissimilar and engaged in product development;(ii) non-availability of segmental information;(iii) there was acquisition and restructuring and (iv) the said Company had turnover of more than ₹ 200 crores. 15. That the TPO erred on facts and in law in excluding Vama Industries from the list of comparables even though the Company had pa .....

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prejudice, the AO/TPO erred in denying the claim of benefit of standard deduction of +/- 5% contained in the proviso to Section 92C(2) of the Act to the Appellant. 19. That the Ld. AO erred on facts and in law in mechanically initiating penalty proceeding under Section 271(1)(c) of the Act without recording any adequate satisfaction for such initiation. 3. During the relevant assessment year, the assessee rendered software development and business support services to its AE viz. CashEdge Inc., U .....

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transactions representing software development services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee is arrived at 11.16% on cost; whereas the average PLI of the comparables is arrived at 6.90% as per .....

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articulars Software development Operating revenue 13,10,68,578 Operating expenses 11,79,10,622 Operating profit 1,31,57,956 OP/TC 11.16% Method use TNMM PLI OP/TC No of comparables 14 Mean margin of comparable 6.90% 5. The TPO vide an order dated 24.01.2014 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparable selected by the assessee. Thereafter the TPO selected a list of 10 comparables and proposed an adjustment of ₹ 1 .....

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margin of the assessee as well as comparable companies as per the guidelines provided by Safe Harbor Notification dated 18.09.2013. 7. As per the said directions, revised final list of the comparable companies is as under :- S.No Name of the Company OP/OC 1 Evoke Technologies Private Limited 18.56% 2 Quintegra Solutions Ltd. -8.20% 3 R S Software (India) Ltd. 10.18% 4 Sasken Communication Technologies 17.54% 5 Persistent Systems Limited 29.02% 6 Thinksoft Global Services Ltd. 17.35% 7 Wipro Tec .....

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t 11,63,61,750 ALP @ 22.86% 14,29,62,046 Price Received 13,10,68,578 105% of price received 13,76,22,007 Adjustment u/s 92CA 1,18,93,468 9. During the course of hearing, the learned counsel for the assessee Shri Jolly submitted that since the Order passed by the TPO after directions were issued by the DRP was not in conformity with the directions of the DRP (insofar as allowance of working capital adjustment and furnishing the annual report of Wipro Technology Services Ltd.), the subsequent proc .....

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the list which was finally selected by the DRP: i. Persistent Systems Ltd. ii. Wipro Technology Services Ltd. iii. Zylog Systems Ltd. (b) treatment of foreign exchange fluctuation gain/loss as operating item; and (c) Addition of transfer pricing adjustment to income assessed under Section 115JB (MAT). 11. We have considered the rival submissions and perused the material on record. First, taking up the each of the comparables contested and disputed by the assessee in this appeal. PERSISTENT SYST .....

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015. 13. The DRP repelled the objection of the assessee as under: The taxpayer primarily wants this comparable to be excluded on account of • Functionally Different • Significantly high turnover • Significant RPT>10% The company is involved in diversified activities like testing, professional services and customer support (Source page 76 of Annual Report March 2010) However, as per P-82/AR Income The company is engaged in providing outsourced product development services to Ind .....

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this regard is rejected. 14. Before us the learned counsel, vide written submissions, submitted as under: Functionally dissimilar: It is submitted that the company is not only engaged in software development services but also sale of software products and licenses. It is seen that the company deals in products like Wave Relay®, Android™ Kit, Integration Board Gen4, Quad Radio Router, Tracking Antenna System, Management Tools, Cloud Relay™, Firefighting Kit etc. Diversified busin .....

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nctionally different from the assessee as the company is into software development services as well as software products unlike the assessee who is a captive service provider. Moreover, no segmental details are available in the annual report. It can be thus derived that the prices may have been influenced. 15. The Ld. Sr. DR, on the other hand, contended that the assessee also assists its parent company in development of products ultimately sold by the parent company and, therefore, the business .....

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O's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at ₹ 288.93 million as against the revenue from software development services at ₹ 4829.57 millions. Though this company is more engaged in software development services, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on en .....

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u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., als .....

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nt services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables. Similarly, in the case of assessee s group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 .....

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case of the assessee is that Zylog is not only engaged in software services but also software and hardware products and the revenue of the company is also derived from licensing of software products. It is submitted that there is no segmental information regarding revenues of ₹ 968.19 crores which, as per the annual report of Zylog, is derived both from services and products. It was further submitted that the assessee had included Zylog Systems (India) Ltd. in its list of comparables whic .....

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s under: Functionally dissimilar: it is submitted that the company is not only engaged in software services but also products and the revenue of the company is derived from licensing of software products. The company deals in software products like Bank Companion- Mobile Banking Software, Closed Loop Marketing Software- CLM, INFORManufacturing & Distribution, TalentFlow, Pharmetrix etc. During the year, Zylog implemented orders for smart cards for State of Karnataka which demonstrates that i .....

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Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO. Therefore, the DRP was not correct in holding that the assessee had himself selected Zylog. We also find from a perusal of the annual report that Zylog is not only engaged in software services but also software products and the revenue of the company is also derived from licensing of software products. Therefore, Zylog cannot be said to be a valid comparable at the entity level. 22. Further, as per annua .....

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rores. 23. In view of the aforesaid, we deem it proper to set-aside the issue of inclusion/exclusion of Zylog back to the file of the TPO for reconsideration. Needless to mention, the TPO shall decide on this aspect after allowing the assessee adequate opportunity of being heard. However, we make it clear that unless audited segmental data for the software development services segment of Zylog is available, which satisfies all filters applied by the TPO, the said company cannot be treated as com .....

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nce taxpayer has objected this company also on the ground that the annual data is not available, therefore TPO is directed to provide the necessary data to the taxpayer. Reference website indicates that the company is involved in the provision of program management and third party information security assessment services to businesses that outsource technology and operations to third party vendors in India. The company also offers software quality management, quality assurance, and business proc .....

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It is very difficult to find an IT company which is providing exactly same service as that of the taxpayer. Even the taxpayer have not been able to provide comparables which are doing exactly same activity. Besides, while applying TNMM, different verticals and also minor functional differences between the companies do not matter. Services being provided by the company are in nature of IT services and therefore it is a good comparable. 26. Before us the learned counsel, vide written submissions, .....

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AY 2010-11 (ITA No.955/Del/2015) has held the company to be incomparable for detailed reasons set out in that decision. The facts obtaining in the case of Agnity and the present case are similar insofar as both the assessees are into software development services. In that view of the matter, Wipro Technologies Services Ltd. has to be excluded from the list of comparables. Without prejudice, it is submitted that before 20.01.2009, the Company was part of the Citi group and rendered services to v .....

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y, this income should be included in the RPT threshold, thereby making the Company as an unviable comparable. In terms of Section 92B (2) of the Act, rendition of service by an enterprise (WTS) to a non-associated enterprise (Citi Group in the present case) as part of an understanding between the associated enterprise (Wipro) and the non-associated enterprise (Citi Group) is treated as a deemed international transaction for the purposes of Chapter X of the Act. Since in the present case it appea .....

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ng of international transaction entered into by the Assessee with its associated enterprise. Even otherwise this kind of commitment is not in the usual course of business and would qualify as an extraordinary event during the year since it is going to affect the profit margin of the company. Such extraordinary events in a year make the comparable unviable. Without prejudice to the aforesaid, the TPO failed to provide the complete annual report of the said comparable inspite of the specific direc .....

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O to provide the annual report to the Appellant. However, despite the specific directions of the DRP and letter dated 05.12.2014 filed by the Appellant asking for the annual report of the said company, the TPO passed order dated 29.12.2014 without providing the annual report of WTS to the Appellant. It was further submitted that even when the Appellant filed an application for rectification under Section 154 of the Act before the TPO on 02.02.2015 and made specific requests for the annual report .....

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has deleted the said comparable on the ground of functional dissimilarity. 27. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that WTS is a good comparable. 28. We have considered the rival submissions and perused the material on record. The arguments of the ld. AR that only on account of super normal profit this comparable should be excluded is not tenable in the light of the Hon ble jurisdictional High Court decision in the case of ChrysCapital Inv .....

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f the former. Secondly, before the DRP, the assessee raised the other objections as were raised before us i.e. this company is rendering different services, there is insufficient segmental information and it fails RPT filter. So, when the assessee asked for the complete annual report at the time of the original TP proceedings, or the proceedings pursuant to the DRP and also in the rectification proceedings under Section 154, the TPO failed to provide the complete annual report of the said compar .....

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per the profit and loss account of FY 2009-10, 100% income is from 'Revenue' and no further break up is provided, as depicted in the extract of Page 5 below: Schedule 2010 2009 Income Revenue 3,993,928,222 3,643,586,896 Other Income 13 111,817,731 208,593,516 4,105,745,953 3,852,180,412 28.1 No revenue or segmental break up is available between software services and infrastructure support services and no information about the nature of business is available in the annual report. Further .....

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rom few extracts of the annual report, we concur with the submissions advanced by Ld AR that in the absence of the Director s Report and Notes to Account for this comparable are not available in public domain it would not be prudent to take this company as a comparable. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl .....

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pany viz., Fiserv India Pvt. Ltd. 30. 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: We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export tr .....

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B) 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 or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 .....

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C)(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 ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this seg .....

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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 year under consideration. 31. To the same effect is the decision of the Co-ordinate Bench in Fiserv India Pvt. Ltd. - Order dated 26.06.015 passed in ITA No.6737/Del/2 .....

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the AO has added the transfer pricing adjustment of ₹ 1,18,93,468/- to the book profits of the Assessee under Section 115JB of the Act without appreciating that book profits of the company cannot be adjusted except as provided in Explanation 1 Section 115JB(2) of the Act and that transfer pricing adjustment is not one of the adjustments contemplated under that Explanation. He placed reliance upon the following decisions to contend that except for adjustments provided in Explanation 1 Secti .....

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e have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB. 37. The case-law r .....

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