TMI Blog2020 (3) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... rior 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 the assessee as well as comparables - Notes forming part of the Accounts of the assessee for the year under consideration that one of the transactions involving fluctuation in foreign currency is in the capital field, which is, `Purchase of capital goods worth ₹ 13,85,590/-. Forex gain/loss in respect of such a transaction cannot be considered as a part of operating expense/income. The ld. AR candidly admitted that the TPO considered forex gain/loss as non-operating not only for the assessee but also for the comparables. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. Comparability of companies - HELD THAT:- Refracting to functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing 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 the hue of the judgment of Hon ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC). 3. The first issue raised by the assessee through modified ground no.1 and additional ground no.7 is that the reference made by the AO to the Transfer Pricing Officer (TPO) for determining the ALP of a `specified domestic transaction and, in turn, determination of Arm s Length Price (ALP) by the TPO of the `international transaction is invalid and violative of the provisions of section 92CA of the Act. 4. Briefly stated, the facts of the case, as are material for this issue, are that the assessee filed its return declaring total income at ₹ 1,99,54,082/-. Certain international transactions were reported in Form No.3CEB. The AO made a reference to the TPO for det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 report of the assessee in Form No.3CEB wherein the aggregate value of the `specified domestic transactions was shown at ₹ 7.07 crore, the AO sought approval from the Pr. CIT and made a reference to the TPO for determining the ALP of the `specified domestic transactions of ₹ 7.07 crore. The TPO during the course of proceedings before him observed that the value of ₹ 7.07 crore was in relation to international transactions and not the specified domestic transactions . He accordingly determined the ALP of the international transaction of ₹ 7.07 crore. 7. The case of assessee before the Tribunal is that section 92CA does not permit the TPO to determine the ALP of a transaction not referred to him by the AO. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen 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 AO or was not reported, then he is not entitled to determine the ALP of such a SDT directly. 9. The core of controversy in the extant case is that the AO made a reference for determination of the ALP of `specified domestic transaction , whereas the TPO determined ALP of the `international transaction. The contention advanced on behalf of the assessee is that such a determination by the TPO is invalid. There is no doubt that the reference by the AO to the TPO was made for the SDT amounting to ₹ 7.07 crore on the basis of the report by the assessee in Form No.3CEB which states the value of SDT as per books of accounts at ₹ 7.07 crore. Since the stated value of the SDT was more than ₹ 5.00 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 imprimatur to such type of practices. 12. Be that as it may, it is found that the correct value of the reported transaction is ₹ 7.07 crore, for which a reference was made by the AO to the TPO for determining the ALP. The TPO eventually determined ALP of the transaction with a value of ₹ 7.07 crore. In other words, the TPO correctly determined the ALP of the reported transaction of ₹ 7.07 crore for which a reference was made to him, albeit with the nomenclature of `specified domestic transaction instead of `international transaction . The substance of the matter is that the TPO determined the ALP of transaction of ₹ 7.07 crore, which was referred to him by the AO afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 cases where the aggregate value of the reported international transactions does not exceed ₹ 15 crore and still the AO feels it necessary or expedient to get the ALP determined from the TPO. However, once the aggregate figures as given in Column nos. 8 9 exceeds ₹ 15/5 crore respectively, it immediately becomes incumbent upon the AO to make a reference to the TPO after taking approval from the Pr. CIT. There is no choice. There is no question of considering it necessary or expedient. Reference has to be invariably made in such situation. Reverting to the facts and circumstances of the extant case, we find that the AO on finding the figure in column no. 9 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the assessee has challenged the transfer pricing addition of ₹ 79,81,424/- made by the AO in the final assessment order. 20. Succinctly, the factual matrix is that the assessee is an Indian company which was incorporated in the year 1988. It is engaged in providing support services related to software design and development of custom and packaged application, testing and communication thereof. The assessee has been providing software development and support services in the areas of embedded multimedia and multimedia applications and communication systems. The assessee reported two international transactions of Provision of software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. What is true for exports is also true for other items of expenses/income of revenue nature. 22. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice 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 custom reports and dashboards; analytics and business intelligence and development of App Exchange solutions etc. For having more clarity on the nature of services rendered by the assessee, we have also gone through the Agreements entered into by the assessee with its two AEs. These Agreements also provide that the assessee agrees to provide Software Development services to the CLIENT (i.e. the A.E.) as described in Work Orders issued by CLIENT from time to time during the period of the Agreement. The term Work Products has been defined to consist of work including but not limited to reports, specifications, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 recorded by the lower authorities on this issue are correct. Annual report of this company is available at page 336 of the paper book. Page 348 is a copy of its Profit and loss account with the figure of `Revenue from operations standing at ₹ 21.30 crore. Break-up of the Revenue is given in Note No.17 with the remarks Sale of software . The ld. AR contended that it was clear from the Note No.17 that this company had only sale of software and not that of sale of software development services. We do not approve such a contention for the reason that the company used a generaliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, 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 admitted this fact, which is substantiated from the Mumbai Tribunal order noticing the margin of this company at 48.97%, whereas such a margin has been noticed in the case of the assessee at 33.73%. Further there is difference in the figures of revenue. As against ₹ 32.96 crore considered by the Mumbai Tribunal, the figure of revenue as considered in the case of the assessee is ₹ 21.30 crore. This shows that the Mumbai Tribunal, while holding such company to be not comparable, was dealing with it for the A.Y. 2014-15 and not the A.Y. 2013-14 under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment without providing any further opportunity of being heard to the assessee . It means what is required to be done by the AO at the stage of completing the assessment under sub-section (13) is to first pick up the income determination under the draft order; then ascertain the directions given by the DRP; and thereafter religiously give effect to the same by modifying the income computation as per the draft order strictly in accordance with the direction of the DRP. This manifests that once the matter travels to the DRP, the AO/TPO become bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenses and Repairs and maintenance expenses. The assessee furnished only ledger extract of these expenses. The claim was not found to be fully verifiable. An addition of ₹ 5.00 lakh was, therefore, made out of such expenses. The assessee did not raise any objection before the DRP on this addition. Accordingly, the AO made the addition in the final assessment order. 38. We have heard both the sides on the point. It is seen that the AO notified the disallowance of ₹ 5.00 lakh in the draft order. Having not chal ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
