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2020 (3) TMI 331

..... `international transaction’ - HELD THAT:- The case of the assessee is founded on the premise that the correct value of the SDT to be reported in Column no. 9 of Form No. 3CEB was ₹ 2,60,04,296/-, which was wrongly reported in Column no. 8 and vice versa. We do not understand any raison d’etre for the assessee in reporting, at all, the correct value of the transactions of the nature prescribed in section 92BA in the first instance, when it did not cross the threshold of ₹ 5.00 crore, so as to become SDT. The fact that such transactions did not become SDT and required no reporting in Form No. 3CEB coupled with the fact that the assessee still reported it and that too, in a wrong column, gives some strength to the view point canvassed by the ld. DR that the assessee wanted to mislead the Revenue by resorting to the tactic with the ulterior motive. In the ultimate analysis, we hold that no infirmity can be found in the TPO’s action in determining the ALP of the `international transaction’ of ₹ 7.07 crore. Treatment of foreign exchange (forex) gain/loss given by the authorities as an item of non-operating nature in the computation of the ALP of .....

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..... the company. Operating expenses exclusion for calculating the profit margin in the process of determination of the ALP - Once a particular expenditure itself is disallowed, there can be no question of including it in the Operating expenses for calculating the profit margin in the process of determination of the ALP.While upholding the disallowance, we direct to exclude ₹ 5.00 lakh from the Operating expenses of the assessee for the purpose of calculation of its ALP. - ITA No.2331/PUN/2017 - 4-3-2020 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Assessee : Shri M.P. Lohia For the Revenue : Shri T. Vijaya Bhaskar Reddy ORDER PER R.S.SYAL, VP : This appeal by the assessee is directed against the final assessment order dated 28-08-2017 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2013-14. 2. Modified grounds have been filed and also certain additional grounds have been raised by the assessee. Since the additional grounds involve pure question of law and do not require any fresh examination of facts, we admit them in t .....

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..... f the international transaction with book value of ₹ 7.07 crore by proposing transfer pricing adjustment of ₹ 1.11 crore. The case of the assessee is that the TPO was incompetent to determine the ALP of the international transaction when the reference made to him by the AO was only for the specified domestic transaction of equal value. The ld. DR strenuously opposed the contention. 6. Having heard the rival submissions and gone through the relevant material on record, it is observed from the Form No.3CEB, a copy of which has been placed at page 25 onwards of the paper book, that on the front page under Part A of the Form, the assessee reported value of ₹ 2,60,04,296/- against column No. 8: Aggregate value of international transactions as per book of accounts . Against the Column No. 9: Aggregate value of Specified Domestic Transactions as per books of accounts , the assessee reported value of ₹ 7,07,45,549/-. As per the relevant Instructions at the material time, the AO was admittedly bound to make a reference to the TPO in case the value of the reported international transactions/specified domestic transactions exceeding ₹ 15/5 crore. Acting upon the .....

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..... d an international transaction in Form no. 3CEB, and such international transaction comes to the notice of the TPO, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1). On going through the language of sub-sections (2A) and (2B) in juxtaposition to sub-sections (1) and (2) of section 92CA, it becomes explicitly manifest that when the AO makes a reference to the TPO for determining the ALP of an international transaction or SDT, the TPO is supposed to determine the ALP of such transactions. If, however, during the course of proceedings, another international transaction, whether reported or unreported, comes to the notice of the TPO, then he is competent to directly proceed with the determination of its ALP without going through the process of the AO first seeking approval from the Pr. CIT or making a reference to him. The caveat is that the power of the TPO under sub-sections (2A) and (2B) extends only to the international transactions and not the SDT . In other words, if a SDT comes to the notice of the TPO during the course of proceedings before him, for which either no reference was made by the A .....

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..... that when the mistake was brought to the notice of the authorities, it became necessary for them to discard the earlier reference and make a fresh reference for determination of ALP of the international transaction instead of the SDT. 11. We have seen the letter dated 22-03-2016 through which the assessee allegedly rectified its mistake and intimated the correct figures to the AO/TPO. On going through the letter, a copy of which has been placed at page 166 of the paper book, it can be seen that the assessee simply stated that the amount of SDT is below the prescribed limit and the amount of international transaction is ₹ 7,07,45,549/- . Fully aware of the earlier wrong reporting, the assessee still did not open the cards by correctly stating that there was a mistake in the earlier report in Form No. 3CEB, which it was seeking to rectify. With the correct figures of the value of international transactions and the SDTs below the prescribed limit for making a reference to the TPO, the time available with the AO for completing the assessment had squeezed to 31-3-2016, giving him a period of less than a week to take up and complete the entire assessment. We cannot accord our impri .....

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..... subsection (1) of section 92CA which is couched with the words: and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval…. . He emphasized that the AO was supposed to act conscientiously before seeking approval from the Pr. CIT for making a reference to the TPO in terms of this provision. 15. Column nos. 8 & 9 of Form No. 3CEB refer to Aggregate value of international transactions as per book of accounts and Aggregate value of Specified Domestic Transactions as per books of accounts . Subsequent columns contain break-up of the Column nos. 8 & 9 as to the nature of transactions. At this stage, it is pertinent to note that the AO has an option to either suo motu determine the ALP u/s 92C or make a reference to the TPO for doing it u/s 92CA. We have uncontrovertedly noted above, that the AO is bound to make a reference to the TPO in case the aggregate value of the reported international transactions exceed ₹ 15 crore and/or that of the reported specified domestic transactions exceed ₹ 5 crore. The requirement on the part of the AO to consider it necessary or expedient is to be seen only in the context of the .....

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..... is any obligation on the part of the assessee to report it, nor is it required by the AO to determine its ALP, either himself or through TPO. 17. The case of the assessee is founded on the premise that the correct value of the SDT to be reported in Column no. 9 of Form No. 3CEB was ₹ 2,60,04,296/-, which was wrongly reported in Column no. 8 and vice versa. We do not understand any raison d etre for the assessee in reporting, at all, the correct value of the transactions of the nature prescribed in section 92BA in the first instance, when it did not cross the threshold of ₹ 5.00 crore, so as to become SDT. The fact that such transactions did not become SDT and required no reporting in Form No. 3CEB coupled with the fact that the assessee still reported it and that too, in a wrong column, gives some strength to the view point canvassed by the ld. DR that the assessee wanted to mislead the Revenue by resorting to the tactic with the ulterior motive. 18. In the ultimate analysis, we hold that no infirmity can be found in the TPO s action in determining the ALP of the international transaction of ₹ 7.07 crore. 19. Now we proceed to discuss the issue on merits by which .....

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..... ered as operating revenue. We find merit in the contention about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables, but only in respect of transactions in the revenue field and not the capital field. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from exports is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. The Bench found fallacy in the submiss .....

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..... ee as well as the comparables. We hold accordingly. 25. Now we take up the comparability of three companies challenged by the assessee. In order to appreciate the comparability or otherwise of the companies under challenge, it is sine qua non to first understand the functional profile of the assessee. The TPO has briefly referred to the functions carried out by the assessee as that of providing Software Development and Support services in the areas of embedded multimedia, multimedia applications and communication systems as per the requirements of its AEs. There is some further elaboration in the show cause notice dated 19-08- 2016 issued by TPO capturing the nature of assessee s services as implementing end-to-end business processes on force.com platform to help companies run effectively. The nature of services has been noted as existing business process review; implementation of solutions using sales force best practices on the saleforce1 platform; existing application and data migration/import services; integration with third party systems; user interact customization and work flows; implantation of sales force communities for external users of the origination; development of cu .....

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..... figures from the Profit and loss account, it transpires that this company is also into sale of software products. Under the head Expenses at page 304 of the Paper book, this company has recorded a figure of ₹ 24.82 crore as Purchase of stock in trade . Obviously, there can be no purchase of stock in trade if only services are to be rendered. Under the main head of Disclosure of principal product or services , this company has reported against the sub-head of Description of product or services as Acquisition/purchase of IT Hardware and Software including software as a service (SAAS) . The above discussion amply proves that this company is not exclusively engaged in rendering software services as is the assessee. We, therefore, order to exclude this company from the list of comparables. 2. Infobeans System India Ltd. : 28. The TPO proposed the inclusion of this company which was objected to by the assessee contending that the business model of the company was different. Not convinced, the TPO included it in the list of comparables which was countenanced by the DRP. 29. Having heard both the sides and gone through the relevant material on record, we find that the findings record .....

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..... ly when a company develops its software product for self which is licensed to customers that we can say that the company is engaged into software products and not software development services. If on the other hand, a company renders software product development services on contract basis, the company is said to be involved in providing software development services only. Apart from the auditor clearly mentioning InfoBans Systems India Private Limited to be earning all the revenues only from rendering of software services, we find that, unlike a software product company, there is no capitalization of any expenditure on development of software for self in its balance sheet. This shows that this company, like the assessee, is engaged only in providing software development services to its customers. 30. Reliance of the ld. AR on a decision of Mumbai Bench of the Tribunal in M/s. Emerson Electric Company (India) Pvt. Ltd. Vs. ACIT, decision dated 14-06-2019 for treating this company as comparable is not of any assistance as the relevant discussion has been made while dealing with the assessment year 2014-15 and not the A.Y. 2013-14 as is the year under consideration. The ld. AR also ad .....

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..... ically spelt out by the DRP that: Therefore, the upper turnover filter is fixed at ₹ 250 crores and lower turnover filter is fixed at ₹ 2.50 crore . It is thus evident that the upper turnover filter, as applied by the DRP, does not permit the inclusion of R.S. Software (India) Ltd. in the list of comparables, whose turnover exceeds ₹ 250 crore. As the turnover of this company stood at ₹ 293.22 crore, it is obviously more than that approved by the DRP. 33. The ld. DR vehemently argued that the turnover filter approved by the DRP is not enshrined in the statute and hence, the same was rightly tinkered with by the AO/TPO at the time of giving effect to its directions. We fully agree with the first part of the contention of the ld. DR that the statute has not provided any upper or lower turnover filter, but the fact of the matter is that in so far as this case is concerned, once the DRP directed to apply a particular filter that became sacrosanct for the TPO. Sub-section (13) of section 144C provides that : Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete ..….. the assess .....

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..... amount of provision for doubtful debts, having direct link with the sales, is also an item of operating expense. In our considered opinion, Provision for doubtful debts cannot be treated as a non-operating expense. We, therefore, direct to include the amount of Provision for doubtful debts in the expense side of this company for calculating the profit margin. Similar is the position regarding Exilant Technologies. Provision for bad and doubtful debts of this company stands at ₹ 81,91,798/- which can be found in the detail of Other expenses. The TPO while calculating the profit margin of this company reduced such an amount. Following the reasoning given hereinabove, we direct to include Reserve for doubtful debts as an item of operating expenses in calculating the operating profit margin of this company. 37. The only other ground which survives for consideration is the disallowance of ₹ 5.00 lakh made by the AO on page 8 of the assessment order. The AO observed that the assessee furnished details of expenses claimed under the head Office expenses at ₹ 2,43,38,458/-. These expenses included Administrative expense, Finance and legal charges, Office maintenance, Other .....

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