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2016 (5) TMI 252 - ITAT CHENNAI

2016 (5) TMI 252 - ITAT CHENNAI - TMI - Foreign exchange gain treated as non-operating income - Held that:- Foreign exchange gain pertaining to marketing commission segment should be considered as operating income.

Selection of comparable - Held that:- In the present case, the authorities below having held that M/s Spinco’s operations are functionally different than the assessee, in our considered view, M/s Spinco cannot be taken as a comparable. When M/s Spinco ceases to be a compara .....

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.A.No.677/Mds/2015 - Dated:- 30-3-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER For The Appellant : Shri N. Venkatraman, Sr.Counsel, For Ms. V. Ubhaya Bharathi, Advocate, Shri K.R. Sekar and Shri S.P.Chidambaram, Advocates For The Respondent : Dr. B. Nischal, JCIT ORDER PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER This appeal is filed by the assessee against the order of the Dispute Resolution Panel, Chennai, dated 27.11.2014, for the assessment y .....

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ered the foreign exchange gain pertaining to marketing commission segment as non-operating income. It is the submission of the assessee that it has inadvertently omitted to raise specific alternative ground in relation to foreign exchange gain to be considered as operating income while computing the segmental margin of the assessee i.e The TPO while determining Arm s Length Price has erroneously considered the foreign exchange gain as nonoperating item in nature. The ld. Sr. Counsel for the asse .....

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lly following the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd , 229 ITR 383, we admit the additional grounds raised by the assessee. 5. The ld. Sr. Counsel for the assessee, by placing reliance on the decision of Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information vs DCIT in I.T.A.No.1961/Hyd/2011 dated 23.11.2012, submits that the foreign exchange gain earned by the assessee from marketing commission segment should be considered .....

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perused the orders of the lower authorities as well as the decision relied on by the assessee in the case of M/s Capital IQ Information (supra). We find that the issue has been considered by the Bangalore Bench and the Hyderabad Bench of the Tribunal. The Hyderabad Bench in the case of M/s Capital IQ Information (supra) has held in para 27 of its order as under: 27. We have considered the submissions of the parties in this regard. The Bangalore Bench of the Tribunal in the case of SAP Labs India .....

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lowing the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- 16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the ga .....

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Respectfully following the aforesaid decisions of the Tribunal, and considering the contention of the assessee that for the assessment year 2008-09 foreign exchange fluctuation gain/loss has been considered as operating margin while computing the margin of comparable companies, we hold that even for the year under appeal also the same principle should be applied, and while computing the margin for determining the ALP for the assessment year under appeal, the foreign exchange gain/loss has to be .....

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sed grounds challenging the order of the DRP (i) in rejecting comparable uncontrolled price method(CUP) for bench marking marketing support services, (ii) error in determining ALP by using net margins of Spinco, (iii) application of TNMM using external comparables, and (vi) DRP/Assessing Officer erred in not appreciating the fact that the effective rate of commission of 14.80% earned by the assessee during the year is higher than the effective commission rate of 12% considered to be appropriate .....

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er the single comparable adopted by the DRP based on which whether transfer pricing adjustment can be made or not is the question to be decided. 11. The ld. Sr. Counsel for the assessee submits that during the assessment year among other international transactions, the assessee has also entered into international transactions of marketing services with its Associated Enterprise i.e parent company/Head Office. It is submitted that Head Office had also appointed M/s Spinco Biotech Pvt. Ltd, a thir .....

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the marketing services related international transaction was at ALP. The ld. Sr. Counsel for the assessee submits that in the transfer pricing assessment, the TPO held that M/s Spinco is not functionally comparable for the reason that (a) greater role of assistance and greater functions assumed by the assessee-company than M/s Spinco, (b) warranty risk/post sales services, and (c) restrictions imposed on M/s Spinco. It is submitted that based on the difference in the functional profile between .....

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(refer Pg 11 continuation of Para 9.1). (b) Variable risk profile between assessee and Spinco cannot be compared under CUP method (refer Pg 14 continuation of Para 9.4) (c) Spinco is restriced from supplying to intermediaries whereas assessee is not so restricted (refer Pg 14 Para 9.8 of TP order) (d) Couple of decisions wherein it is held that to apply CUP method, Product/services should have close similarity (refer Pg 14 Para 9.6 & 9.7 of TP Order). The ld. Sr. Counsel for the assessee fur .....

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de and after sales segment net margins and proposed adjustment of Rs. 2.33 crores. 12. The ld. Sr. Counsel for the assessee submits that the DRP sustained the TNMM adopted by the TPO and rejected the CUP method. It is submitted that the DRP considered and held that internal TNMM is much better than external TNMM. Accordingly, DRP enhanced the assessment holding that single company M/s Spinco could be considered as a comparable company under TNMM method. He further submits that the DRP directed t .....

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in I.T.A.No. 274/Ahd/13 dated 3.2.2016. He submits that it is a finding of fact by the authorities below that functions performed by the assessee and the functions performed by M/s Spinco are not same. He further submits that as per the provisions of sec. 10B(2), when functions are different, the comparable ceases to be a comparable. The ld. Sr. Counsel further submits that DRP accepts that segmental financials have to be considered and there is no dispute on this. He submits that the only issue .....

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assessee and M/s Spinco are not the similar. DRP also having held that M/s Spinco is not functionally comparable ought not to have proceeded to consider M/s Spinco as a comparable company by adopting a different method. Therefore, it is submitted that M/s Spinco cannot be considered as a comparable company. The ld. Sr. Counsel further submits that a single comparable company will not indicate the industry/segment market trend. Therefore, for the purpose of comparability multiple companies should .....

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UP method adopted by the assessee as the most appropriate method holding that there were wide difference between the assessee and M/s Spinco with reference to the functions and risk assumed. In para 9.4 of the TPO s order, it was specifically brought on record by the TPO that M/s Spinco is functionally different than the assesseecompany and therefore, why it should not be compared under CUP method. Having held that M/s Spinco cannot be considered as a comparable for CUP method, the TPO holds tha .....

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gle comparable and that too a comparable which was functionally dissimilar as held by the TPO can be considered for determining transfer pricing adjustment? In the case of M/s Fortune Infotech Ltd (supra) it was held that in an indirect method like TNMM, a reasonable number of comparables is an important factor to ensure that the results are truly representative of the segment to which the tested party belongs. It was also held that when only one comparable is available for application of a part .....

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ounsel vehemently contended that, on the facts of this case, the internal transactional net margin method was wrongly rejected by the authorities below. His contention was that undoubtedly Fidelity US was an associated enterprise in an earlier accounting period but that aspect of the matter was wholly irrelevant since the prices for work done for Fidelity US were negotiated afresh after this concern ceased to an AE. Learned counsel took pains to take us through the documents in support of the fa .....

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case, he quickly responded that there is no statutory bar on application of a particular method only because one comparable is available for benchmarking. He referred to judicial precedents in support of the proposition so advanced by him. That is not, however, the issue; it is not a question of statutory bar. The question is as to what is the most appropriate method on the facts of that case, and this question cannot be decided in vacuum or in an abstract or theoretical terms. It has be consid .....

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situation, a single comparable is good enough for all the methods of determining arm s price, so as to be treated as most appropriate method for that purpose. In an indirect method like TNMM, a reasonable number of comparables is an important factor to ensure that the results are truly representative of the segment to which the tested party belongs. The situation with regard to direct methods like CUP, as long as transactions are established to be bonafide, could be slightly different. There ar .....

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ng regard to all the material factors, including availability, coverage and reliability of data necessary for application of such a method. The method selected for benchmarking must not only be a permissible method but it also be the most appropriate method on the facts and circumstances of that case and vis-à-vis the other methods which can be applied on the facts of that case. The selection of most appropriate method is not simply deciding a question as to what is permissible and what i .....

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ctions performed by such persons or such other relevant factors as the Board may prescribe. Rule 10C, which prescribes the relevant factors for determining the most appropriate method, as it stood at the relevant point of time, states as follows: Rule 10 C- Most appropriate method. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction and which provid .....

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rises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering .....

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ght, as indeed duty, to examine whether a particular method adopted by the assessee is indeed most appropriate method of determining arm s length price on the facts of a particular case. One of the important factors governing the decision on as to what will constitute the most appropriate method, as set out in rule 10C(1)(c) above, is the availability, coverage and reliability of data necessary for application of the method . The availability of data, with respect to a particular method vis-a-vi .....

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hich sufficient, and essentially reliable, data is available. For this short reason alone, the internal TNMM is certainly not the most appropriate method on the facts of this case. That is one aspect of the matter. The other aspect of the matter is its reliability. The fact that the independent enterprise was an associated enterprise in not so distant a past, the fact that despite its becoming, in legal terms and as an offshoot of group restructuring, an independent enterprise, the assessee cont .....

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