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2016 (4) TMI 1223 - ITAT DELHI

2016 (4) TMI 1223 - ITAT DELHI - TMI - TPA - whether the foreign exchange gain or loss should be considered as operating revenue / operating cost of the assessee or not? - Held that:- The issue is squarely covered in favour of the assessee in view of the decision in Principal CIT Vs. Fiserve India Pvt. Ltd. [2016 (1) TMI 1276 - DELHI HIGH COURT] wherein as directed to treat the foreign exchange gain/ loss as an operating item. Thus hold that foreign exchange fluctuation gain earned by the assess .....

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error in the calculation wherein in case of each and every comparable there are certain errors pointed out. As the submission made by the assessee is not possible for verification at this stage therefore we set aside this issue to the file of ld AO for verification of the claim made by the assessee and correct the figures accordingly and then grant working capital adjustment to the assessee. - Selection to the comparable of Goldstone Technology Ltd - Held that:- Markets in the IS and the In .....

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the assessee on disallowance u/s 14A before invoking rule 8 D of the Income tax rules 1962 is mandatory. The language of section 14A provides that AO must record a satisfaction if he was unsatisfied with any incorrect claim of the assessee including non-disallowance. If he failed to record such a finding then it cannot be said that he rightly invoked provision of section 14A of the act for application of rule 8D. Thus we direct LD AO to delete the disallowance of ₹ 237585/- u/s 14A of the .....

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esults in to enhancement in adjustment and not reduction therein, Ld. TPO should have granted an opportunity to verify the correctness of the computation as a principle of natural justice. Therefore in the interest of justice we set aside ground No.2 of the appeal on Transfer Pricing issues back to the file of ld. TPO with a direction to verify the computation of margins pointed out by LD AR and then correct them for computation of arms length pricing of the international transaction. - ITA No.9 .....

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he Income Tax Act dated 29.01.2014 in pursuance of directions issued by DRP vide direction 20.12.2013. 2. The assessee is engaged in the business of providing software development and related services to its Associated Enterprises. Assessee filed its return of income on 30.9.2009 declaring total income of ₹ 8272250/-. As the assessee has entered into international transactions with its Associated Enterprise ld. Assessing Officer made reference to ld. TPO u/s 92CA of the Income Tax Act for .....

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ated 18.01.2013 ld. TPO computed Arm's length price with respect to software development services of ₹ 651522156/- at ₹ 736907605/- and proposed an adjustment of ₹ 85385449/-. The assessee filed an objection before DRP on 30.04.2013 against the draft assessment order passed by ld. Assessing Officer on 28.03.2013. Ld. DRP issued directions u/s 144C(5) of the Act on 20/12/2013 and pursuant to those directions, order u/s 143(3) read with Section 144C was passed by ld. AO where .....

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ct'}, is bad in law. violative of principles of natural justice and void ab-initio. 2. That assessing officer erred on facts and in law in determining income of the appellant at ₹ 6,92;82,090 against the total income returned by the appellant of ₹ 82,72,250. Transfer Pricing Matters: 3. That the TPO /DRP erred on facts and in law in making an addition of ₹ 6,07,72,255 to the income of the appellant, on account of the alleged difference in the arm's length price of the i .....

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UncontrolledPrice ("CUP") Method to establish the arm's length price wherein man-month rates charged by the Appellant to its Associated enterprises were compared with man-month rates charged by HCL Japan from third parties for rendering similar software development services. 3.3 That the TPO / DRP erred on facts and in law by failing to consider that return on costs after excluding outsourcing costs of the Appellant should be considered. In the process, the DRP has erred by ignorin .....

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ice ("ALP") of the Appellant's international transactions and holding that the international transactions are not at arm's length. 3.5 That the TPO/ DRP erred on facts and in law by arbitrarily applying turnover filter of ₹ 5 crores for selecting / rejecting the comparable companies. 3.6 That the TPO / DRP erred on facts and in law in adopting additional filter of export sales lessthan 75% of total sales without demonstrating the difference in profits earned by the/Com pa .....

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nly for failing the employee cost filter without issuing a notice u/s 133(6) to ascertain the functional profile of the company. 3.10 That the TPO/ DRP erred on facts and in law in considering CAT Technologies Ltd. in the final set of comparable companies not appreciating that the said company is functionally different from the appellant and complete financial information of the company is not available in public domain for application of filters adopted by him. 3.11 That the TPO/ DRP erred on f .....

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a Consultancy Services Limited (iv) Sasken Communications Technologies Limited 3.13 That the TPO / DRP erred on facts and in law in considering Infosys Technologies Limited and Tata Consultancy Services Limited in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of comparability laid down under Rule 10B{2) of the Income Tax Rules, 1962, for being operating in different market conditions and level of competition. 3.14 That .....

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onsite revenue whereas the entire revenue of is from offsite operations: i. ZylogSystems Limited ii. Maars Software International Limited 3.16 That the TPO / DRP erred on facts and in law by disregarding thefunctional profile of the comparable companies and resorting to cherry picking of the comparable companies in the final set of comparablecompanies and resorting to selection of companies which are functionally different to the Appellant. 3.17 That the TPO / DRP have erred by selecting certain .....

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Margin considered by TPO Actual margin Sasken Communication Technologies 51.44 27.74 Thirdware Solution 37.27 28.33 Goldstone Technologies Ltd. 10.28 -23.26 LGS Global Limited 18.79 18.05 Thinksoft Global Services Limited 16.56 16.27 3.20 That the TPO / AO made a computational error in determining the average operating profit margin (OP/OC%) of the comparable companies at 24.44% instead of 21.53%. 3.21 That the TPO / DRP erred on facts and in law in rejecting comparability adjustment on account .....

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on facts and in taw in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent software service provider, allegedly holding that in absence of robust and reliable data, both of assessee and comparables, risk adjustment cannot be considered for enhancing the comparability. 3.24 That on the facts and in the circumstances of the case and in law the TP .....

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g the-same to be expenditure incurred for earning of tax free dividend income from investments in mutual fund. 4.1 That the assessing officer erred on facts and in law in proceeding to make disallowance under section 14A on the basis of method/ formula prescribed in Rule 8D of the Income-tax Rules, without appreciating that preconditions for applying the said rule as prescribed in subsections (2)/ (3) of section 14A of the Act were not satisfied. 4.2 That the Assessing Officer erred on facts and .....

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the other grounds of appeal. 5. Ground Nos.1 and 2 are general in nature and therefore they are dismissed. 6. Ground No.3 to 3.24 are related to transfer pricing issue with respect to adjustment of ₹ 60772255/-. 7. Brief facts of the case is that in the TP Study report assessee has determined arm's length price of its international transactions applying TNMM method as the most appropriate method and selected 20 comparables adopting operating profit/ cost as the PLI where the arithmeti .....

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es remain at 24.44% and thereby resulting into an adjustment of ₹ 60772255/-. 8. At the time of hearing the ld AR of the appellant submitted that he is contesting following specific issues against the transfer pricing adjustment. a. Consideration of foreign exchange gain or losses to be considered as operating income. b. Working capital adjustment to be made from the balance sheets of the comparable and not from the software prowess c. Exclusion of comparablesGoldstone Technologies Private .....

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decision of Pri. CIT Vs. Fiserve India Pvt. Ltd. dated 06.01.2016 wherein Hon'ble Court refused to admit appeal of the revenue against order of Coordinate bench on issue that foreign exchange fluctuation are operating expenses/ income. Therefore he submitted that the issue is now squarely covered in faovur of the appellant. b. Regarding the working capital adjustment he submitted thatld. TPO did not provide the working capital adjustment because according to him the taxpayer did not demonst .....

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any. Therefore now only grievance remain is that the ld. TPO has taken the figures for working capital adjustment as per the figures available in software 'prowess' and they are not as per the balance sheets of the comparables. Before us he has submitted a chart wherein he has demonstrated that many of the figures taken by the ld. TPO are not according to the balance sheet of the comparable company. Therefore he submitted that working capital adjustment should be allowed based on the bal .....

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computation of profit of segments are not clear and therefore this comparable is inappropriate. Therefore he submitted that this comparable should be excluded. 10. The ld DR on the above issue relied on the orders of ld. TPO and ld. DRP. 11. We have carefully considered the rival contentions and our decision and their reasons are as under:- 12. The first issue is whether the foreign exchange gain or loss should be considered as operating revenue / operating cost of the assessee or not. Now the i .....

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CIT (ITA No.4446/Del/2002). Accordingly, the AO/TPO was directed to treat the foreign exchange gain/ loss as an operating item. The AO/TPO was directed to compute the ALP of the international transactions entered into by FIPL with its AEs keeping in view the observation made in the order of the ITAT." 13. Further in the assessee's own case ld. DRP for AY 2011-12 while disposing off ground No.7 of the objection for that year has held that foreign exchange fluctuation in the case of the a .....

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is. 14. On working capital adjustmentsIn the 154 proceedings the ld. TPO has granted it to the assessee. However, it is submitted before us that ld. TPO has considered incorrect margins as the ld. TPO has taken figures from the data base (prowess) and not from the actual balance sheets of the comparable company. A chart is also submitted before us showing error in the calculation wherein in case of each and every comparable there are certain errors pointed out. As the submission made by the asse .....

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n held with respect to this comparable for the AY 2009-10 that is the same assessment year as under:- "7. Having considered the above submissions and having examined the orders of the TPO the DRP as well as the ITAT, this court is not persuaded that the impugned order of the ITAT suffers from any illegality. The view taken by the ITAT that markets in the IS and the India were fundamentally different and, that the results of the Indian segment of the US operations of Goldstone Technologies c .....

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e is in appeal before us, we respectfully following that decision direct the ld. TPO/AO to exclude M/s. Goldstone Technologies Pvt. Ltd. as it is an inappropriate comparable. 17. In view of our above findings, we dispose of ground no 3 of the appeal of the assessee on transfer pricing issues with above directions. 18. The next ground of appeal is on Corporate Tax matter against disallowance of ₹ 237585/- made by ld. Assessing Officer u/s 14A of the Income Tax Act. Brief facts of this groun .....

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he same contentions which have been raised before ld. DRP at page No.15 and 16 of the directions. 20. Ld DR relied on the orders of lower authorities. 21. We have carefully considered the rival contentions. One of the arguments raised by the assessee is that in the draft assessment order LD AO has not specifically recorded his dissatisfaction about the correctness claim of the assessee that there is no expenditure incurred in connection with the earning of the exempt income. Ld AO has directly a .....

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-2011-DEL] & CIT' v. Taikisha Engineering India Ltd.[2015J 229Taxman 143 (Delhi)] wherein same viewhasbeen expressed that recording of satisfaction on the correctness of claim of the assessee on disallowance u/s 14A before invoking rule 8 D of the Income tax rules 1962 is mandatory.The language of section 14A provides that AO must record a satisfaction if he was unsatisfied with any incorrect claim of the assessee including non-disallowance. If he failed to record such a finding then it .....

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dismissed. 23. In the result appeal of the assessee in ITA No 926/ Del /2014 is partly allowed. 24. Now we come to the Appeal of the Assessee in ITA No.2776/Del/2015 which is filed against the order u/s 154 of the Income Tax Act dated 20.04.2015. The brief facts of the case is assessee moved an application before the ld. DRP u/s 154 of the Act on 02.04.2014 requesting rectification of its directions issued on 20.12.2013 of the Act. The mistake apparent from the record pointed out by the assesse .....

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f the comparables companies from 'prowess' data base instead of computing the margins as per the annual reports of the company. After this exercise it resulted into enhancement of the adjustment to ₹ 63863214/- instead of original adjustment of ₹ 60772255/-.The ld. Assessing Officer pursuant to the order of the TPO passed an order u/s 154 on 20.04.2015 incorporating the enhancement of ALP to ₹ 63863214/- and assessee has filed appeal against that order. 25. The assessee .....

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ion of ₹ 6,07,72,255 on account of the alleged difference in the arm's length price of the international transactions of rendering software services made in the order passed under section 143(3) of the Act read with Section 92C(3) of the Act. 2.1 That the assessing officer erred on facts and in law in arbitrarily considering incorrect profit margin of certain comparable companies: Name of the company Margin considered by TPO Actual margin Goldstone Technologies Ltd. 10.28% -23.36% LOS .....

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sen & Toubro Infotech Ltd 22.54% 20.45% LOS Global Ltd 15.10% 13.08% Mindtree Ltd 28.52% 25.92% Persistent Systems Pvt Ltd 38.48% 37.46% RS Software India Ltd 11.96% 11.94% Sasken Communication Technologies 28.26% 26.40% Tata Consultancy Services 32.70% 29.43% Tata Elxsi 20.03% 16.10% Thinksoft Global Services Ltd 15.08% 14.13% Thirdware Solutions Ltd 36.85% 35.96% Average 24.98% 18.73% 2.3 That the TPO / DRP erred on facts and in law by failing to appreciate the commercial expediencies surr .....

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pment services." 26. Before us the Ld. AR submitted that the ld. TPO has computed incorrect profit margin of certain comparable companies as well as incorrectly computed the working capital adjustment to the operating margins of the comparables companies. He submitted that the respective errors are pointed out in para 2.1 and 2.2 of the grounds of appeal itself. He also submitted a chart stating that this error has happened due to the details extracted by the ld. TPO from the 'prowess&# .....

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