TMI Blog2018 (5) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... providing adjustment in terms of foreign exchange fluctuation is concerned in respect of comparables, assessee is directed to provide necessary details in respect of any such risk assumed by such comparables that has been finally selected hereinabove for purpose of benchmarking international transaction. Ld.TPO shall then verify the same and accordingly grant risk adjustment while computing margin of assessee. - ITA No. 537/Del/2015 - - - Dated:- 10-4-2018 - SHRI N.K.SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER For The Appellant : Sh. Sanjeev Sapra, FCA And Sh. Amit Mathur, FCA For The Respondent : Sh. Kumar Pranav, Sr. DR ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 29/12/14 passed by Ld. ITO, Ward 14 (3), New Delhi for assessment year 2010-11 under section 143 (3) read with s. 144C(5) of the Income Tax Act, 1961 (the Act) on the following grounds of appeal: 1. That the Ld. Assessing Officer (AO), Ld. Transfer Pricing Officer (TPO) and Hon'ble Dispute Resolution Panel (DRP) have erred on facts and under the law in: ( i) passing the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal. 2. Brief facts of the case are as under: Asessee filed its return of income declaring nil income on 29/09/10 and claimed deduction under section 10 A of the Act. Book profit declared by assessee was of ₹ 47,38,771/-under section 115 JB of the Act. The return was processed under section 143(1) and upon selection for scrutiny, statutory notices were issued to assessee in response to which Representatives of the assessee attended the assessment proceedings and filed details as called for. 2.1 . Ld. A.O. observed that assessee is engaged in the business of providing various types of data as well as Information Technology Enabled Services (ITES) to its Associate being Keystroke Pro Ltd. U.K. It was observed that during the year under consideration assessee undertook international transaction to the tune of ₹ 5,23,06,598/-with its Associated Enterprise (AE). Ld. AO accordingly referred the matter to Ld. Transfer Pricing Officer (Ld.TPO) for determining the arm s length price of the international transaction entered into by assessee with its AE. 2.2. Ld.TPO accordingly on receipt of information, called for various details from assessee. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Functions: Definite role played by associated enterprise and assessee in the international transaction are as under: 3. FUNCTIONS UNDERTAKEN/ PERFORMED BY EACH ENTERPRISE Details of functions undertaken/performed by KSPL: During F.Y. 2009 - 10, KSPL provided transcription and data processing services to its clients based out of UK and US. KSPL functions comprised mainly of identification of potential clients, conducting sales marketing activities, promoting procuring business, arranging for funding as required for business, negotiating terms with clients, collecting payments from clients, project management, managing client relationships, preparing design work flow systems reporting in response to specific client needs, confirming to quality standards as agreed with clients and taking instructions feedback from clients. In order to provide services to clients, KSPL has taken certain services from KSPIPL and for such purposes, it provides technical expertise, assistance, advice to KSPIPL to carry on its operations in India in such a manner so as to be able to provide KSPL with necessary services as sought. Apart from the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of idle/unutilised capacity. Hence assessee does not bear any capacity utilisation risk, but by its AE since it guarantees a certain turnaround time for providing transcription services to its client. Assessee does not enter into any contract with end customer which are contracted directly and therefore AE is solely responsible for any liability arising out of customer contracts. HR management risk arises on account of high staff turnover. The staff engaged by assessee needs to be extensively trained with the help and guidance of AE. In order to retain trained staff, additional costs are required to be borne in the form of higher salaries etc. which are passed on by assessee to AE by way of charging them on actual cost plus margin basis. Hence all HR management risks are entirely borne by AE only. 4 . Assessee raises invoice on AE in GBP and receive payment in GBP, which is then converted to INR. Hence assessee assumes such foreign exchange fluctuation risk when GBP is converted into INR but such risk is mitigated/passed onto AE because fees discharged by assessee to its AE on the basis of profit margin (which varies from 5% to 15%) on all actual direct and indirect c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,093/-. 8.1 . Ld.TPO rejected the claim of loss arising on foreign exchange conversion of the amount that was kept in EEFC account by assessee as income from other sources. Instead Ld. TPO considered it to be a part of business loss. 8.2 . It was submitted by assessee that foreign exchange gain of ₹ 8,55,729/- on account of exchange fluctuation of export proceeds was to be netted against the foreign exchange loss of ₹ 4,44,536/- on account of exchange fluctuation due to conversion of funds as income from other sources. 8.3 . Aggrieved by adjustments proposed by Ld. TPO, assessee raised objections before DRP. DRP upheld the adjustments suggested by the TPO and accordingly directed Ld. AO to pass final assessment order. 8.4 . Aggrieved by final assessment order passed by Ld. AO, assessee is in appeal before us now. 9. Ground No. 1 2 are in respect of the selection/rejection of comparables and adjustment that has been made of ₹ 76,57,655/- being difference in margin of comparables finally selected by Ld TPO vis-a-vis that of the margin computed by assessee. 9.1 . Ld.Counsel objects for inclusion of the following comparables: 1. E4 Heal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test is not satisfied between these companies, we direct Ld. TPO to exclude this comparable from the list. (b) Jindal Intellicom Pvt.Ltd Ld.Counsel do not wish to press this comparable. Accordingly we direct the ld.TPO to retain this comparable in the final list. (c ) ICRA Techno analysis Pvt.Ltd This company is disputed by assessee to be included as it is engaged in software development and consultancy, engineering services, Web development and hosting and subsequently diversify itself into the domain of business analytics and business process outsourcing. Ld.Counsel submitted that functions of this comparable is not similar with that of assessee which is in the services of transcription/data processing. On the contrary Ld. CIT DR placed reliance upon observations of Ld. TPO for inclusion of this comparable. We have perused submissions advanced by both the sides and observed that this comparable is involved in providing software development and consultancy services, engineering services, Web development and hosting services. Further it is also observed that segmental information in respect of each of these services are not available and therefore it is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for purposes of determining the arm s length price. (e) Infosys BPO Ltd Ld.Counsel submitted that this company is not comparable due to high turnover which is approximately 215 times that of assessee. It has been submitted that revenues earned by this company are from software services and are one of the big giants in software industry. It has been also submitted that this company assumes all risks leading to higher profits and also owns a lot of intangibles. Ld. CIT DR supported inclusion of this comparable by placing reliance upon observations of Ld. TPO. We have perused the submissions advanced by both the sides in the light of the records placed before us. On perusal of financials, it is observed that this company has got huge turnover and goodwill being one of the giants in the software industry. It is observed that this company has not been considered as comparable for low-end BPO services. We are therefore of considered opinion that this company should be excluded from list of comparables. 10 . On the basis of the above analysis, we direct Ld. TPO to consider/exclude comparables as directed above. We also direct ld.TPO to consider working capital adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed to gain and loss earned by assessee from its business income. He submitted that foreign exchange gain and loss has been derived from trading activity. He submitted that therefore loss cannot be treated as income from other sources instead has been rightly considered as business loss. Insofar as considering the gain as non-operative income, assessee has not been able to provide any details regarding foreign exchange risk faced by comparables. Therefore Ld. TPO has rightly rejected the inclusion of foreign exchange gain while computing the operating margin of assessee. 12.2 . We have perused the submissions advanced by both the sides in the light of records placed before us. 12.3 . We have analysed risk assumed by assessee in terms of foreign exchange as recorded in the TP documentation vis-a-vis the gain and loss earned by assessee during the year under consideration. Ld.Counsel placed reliance upon page 18 of paper book volume-1 wherein the details of foreign exchange fluctuation rate for year under consideration from export proceeds have been listed. It is observed that loss as well as gain has been earned by assessee from its export proceeds being its business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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