TMI Blog2018 (9) TMI 2133X X X X Extracts X X X X X X X X Extracts X X X X ..... ng item. Therefore respectfully following the decision of the ITAT Bangalore in the case of SAP Labs [ 2010 (8) TMI 676 - ITAT, BANGALORE ] we hold that the foreign exchange gain or loss should be treated as operating in nature and that such gain or loss as reflected in the books of accounts of the Assessee for the relevant previous year should be adopted as the basis. We therefore hold that the foreign exchange gain ought to either be included in the assessee's operating income or reduced from its operating costs, as it has done in its TP study. Whether write back of the liabilities no longer required and also to be regarded as operating in nature ? - The decisions referred to by Assessee supports the plea of the Assessee write back of the liabilities no longer required are also to be regarded as operating in nature. In this regard it has not been disputed by the TPO/DRP that the liabilities written back as no longer required were all relating to operating expenses which had been treated as an operating item in the years they were expected to have been incurred. Therefore, the write back of such liabilities ought to also be considered as an operating item in computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch (India) Pvt. Ltd., was originally incorporated in India as Agere Systems International LLC, USA, which was in turn, a subsidiary of Agere Systems Inc., US. Consequent to the merger of Agere Systems Inc., US with LSI Logic Corporation, California in the year 2007-08, the latter became the ultimate holding company of the Assessee. Thereafter the Assessee had changed its name to LSI Research (India) Pvt. Ltd. Consequent to merger with M/S. LSI Technologies (India) Pvt. Ltd., the Assessee is known as LSI India Research Development Pvt. Ltd. 3. The Assessee in IT(TP)A No. 45/Bang/2014 is M/S. LSI Technologies (India) Pvt. Ltd., was originally incorporated in India as Velio Communications India Pvt. Ltd. in October 2002 and was a subsidiary of Velio Communications international Inc., Cayman Islands, which was, in turn, a subsidiary of Velio Communications Inc., USA. Consequent to the acquisition of Velio Communications Inc., USA, by LSI Logic Corporation, California, the assessee changed its name to LSI Logic (India) Private Limited. Thereafter, the assessee was renamed as LSI Technologies India Private Limited. Consequent to. merger, with M/S. LSI Research (India) Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the TP Study As per the TP order Operating Income Rs. 117,11,69,014 Rs. 114,14,78,545 Operating Expenses Rs. 101,23,52.133 Rs. 110,35,56.637 Operating Profit (Op. Income -OP. Expenses') Rs. 15,88,16,881 3,79,21,908 Operating/Net margin (OP/TC) 15.69% 3.44% 7. In computing the margins, the TPO - reduced an amount of Rs. 2,96,90,469/-, being the amount of liabilities no longer required written back, from the operating income and reversed the Assessee's action in reducing an amount of Rs. 8,54,07,158/-, being foreign exchange gain, as well as a sum of Rs. 57,97,346/-, being interest expenses, from its operating expenses, and thus treated the aforesaid sums as being non-operating in nature. These are the reasons for the difference in the computation of OP/TC by the Assessee and the TPO. The Assessee had chosen 17 companies as comparable with that of the Assessee and arrived at Arithmetic mean of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee and the comparable Companies at a much higher figure nevertheless restricted the adjustment towards WC to 1.71%. The DRP, however, did not approve of this action Of the TPO and directed that the WC adjustment ought to be given as per actual figures without there being any cap thereto (Page 69 of the DRP's directions). 10. Computation of the arm's length price by the TPO and the adjustment made: ( Arm's Length Mean Margin 24.32% Less: Working Capital Adjustment 0.99% Adjusted mean margin of the corn parables 23.33% Operating Cost Rs. 110,35,56,637 Arm's Length Price (ALP) 123.33% of Operating Rs. 136, 10,16,400 Price Received Rs. 114,14,78,545 Short fall being adjustment u/s. 92CA Rs. 21,95,37,851T 11. The Assessee filed objections before the Dispute Resolution Panel against the determination of ALP by the TPO as above. The DRP however confirmed the action of the TPO except to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 Rs. 114,14,78,545 Other income being liabilities no longer required written Rs. 2,96,90,469 - Total Income Rs. 117,11,69,01 Rs. 114,14,78,545 Operating and other Rs. 95,13,15,618 Rs. 95,13,15,618 Depreciation Rs. 6,10.36,515 Rs. 6,10,36,515 Foreign exchange gain - RS. 8,54,07,158 Interest expenses - Rs. 57,97,346 Total Expenses Rs. 101,23,52,13 Rs. 110,35,56,637 Profit Rs. 15,88,16,881 Rs. 3,79,21,908 NCP (in %) 15.69 3.44 15. As far the issue treating foreign exchange gain as operating revenue is concerned, it has been held in several decisions of various Benches of ITAT that foreign exchange gain, to the extent it relates to or connected with the business for which ALP is deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .08.2010 relevant Para of this Tribunal order have been reproduced by Tribunal in that order as per which it was held that foreign exchange gain is nothing but an integral part of the sales proceeds of an assessee carrying on export business. TO this extent, there is no quarrel but in our considered opinion, even after holding that the Foreign Exchange fluctuation gain is operating profit, it has to be seen as to whether the same can be considered for the purpose of computing ALP if the said gain is not in respect of sale of the present year. This is so because for the purpose Of ALP under TNMM, what is determined is the percentage of profit by dividing the profit of the year by turnover of the year and such profit percentage of the assessee is compared with the average profit. percentage of the comparables. Hence, even after holding that foreign exchange fluctuation gain is operating profit, it has to be seen as to whether the said gain is in respect of turnover of the present year or turnover of the earlier year because if the gain is on account of turnover of the present year than the gain is included in the numerator i.e. profit but the relevant turnover is not included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts of the comparable companies because the terms of credit are almost identical in the line of business of SWD Services and ITES. The Id. counsel for the assessee, however, pointed out that the Hon'ble Delhi High Court in the case of Pr. CIT v. Ameriprise India (P.) Ltd. in IT Appeal No.206/2016, judgment dated 23-03-2016 has taken the following view: The ITAT has in the impugned order noted the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non-operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise (AE) AND THE Assessee stated that for the specified products and services provided by the Assessee, it shall raise invoices Oh Ameriprise USA on the basis of a cost plus pricing methodology. The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non-operating cost. 19. We have considered the rival submissions and are of the view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the decisions of the ITAT Delhi Bench in the Case of Sony India (P.) Ltd. v. Dy. CIT 1 [2008] 114 ITD 448 (Delhi) at paras 106,1 to 107 at page 33], Bangalore Bench of ITAT in the case of Logica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang.) at paras 7-11 at page 5] and CGI Information Systems and Management Consultants (P.) Ltd. v. Dy. CIT [TS-860-ITAT-2016 (Bang.)-TP]-TP at paras 9 and 10 at pages 17-21] wherein a view has been taken that provision for liabilities no longer required which are written back must be taken into consideration as an operating item while computing the operating margins. The learned DR submitted that provisions written back cannot be regarded as operating in nature as it does not relate to the relevant previous year. 21. We have given a careful consideration to the rival submissions and are of the view that there is merit in the stand taken on behalf of the Assessee. The decisions referred to by the learned counsel for the Assessee supports the plea of the Assessee write back of the liabilities no longer required to the extent of Rs. 2,96,90,469 are also to be regarded as operating in nature. In this regard it has not been disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. It was submitted that if CG Vak's entire employee costs for FY 2008-09 are properly considered, it would then pass the employee cost filter applied by the TPO. Thus, it is submitted that CG Vak is comparable to the Appellant in all respects and, but for its rejection on the above ground, it passed all the filters applied by the TPO. The Assessee has also placed reliance on the decision of this Hon'ble Tribunal in Autodesk India (P.) Ltd. v. Dy. CIT [Order dated 13.05.2016 in IT(TP)A No.1369/Bang/2014 at paras 7.1 to 7.3 at pages 13 to 16] wherein the comparability of CG-Vak was remanded to the TPO for computation of the correct employee cost. We are of the view that the request made by the Assessee in this regard deserves to be accepted. Accordingly, the TPO/AO is directed to consider the employee cost vis-a-vis turnover of the Assessee by taking the correct sum of employee cost as directed in the decision in the case of Autodesk India (P.) Ltd. (supra). 25. The 'next aspect to be considered is the grievance of the Assessee with regard to inclusion of the following 7 companies, whose names as listed in the following paragraphs as comparable companies. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. v. ITO [2016] 72 taxmann.com 68 (Bang. - Trib.) (paras 12-14 at page 6) wherein this Hon'ble Tribunal directed exclusion of the said company in the cases of other assessees who are engaged in performing identical functions as that of the Assessee and those decisions were rendered for AY 2009-10. The learned DR however brought to our notice the observations of the TPO for inclusion of this company as comparable. The TPO has observed in his order that this company has not carried out any Research Development and that segmental information is given at page-19 of the annual report and it reveals that this company apart from software development services rendered only training services and did not deal in any software products. She prayed that these aspects were not considered in the earlier decisions of the Tribunal and submitted that the issue should be remanded to the TPO for? fresh consideration. We are of the view that it would be just and proper to remand the issue to the TPO for fresh consideration. The TPO in exercise of powers u/s. 133(6) of the Act can call for the required information about the existence of software products in the case of the comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n development, application outsourcing, architecture services, business process services, SAP services, data warehousing SAP, infrastructure management services etc. During the financial year 2008-09, the company had launched new service lines which are in the nature of both IT and IT enabled services as can be seen from page 3 of its annual report. The company has also taken measures with regard to branding its trademark and logo. The company is therefore functionally not comparable to the Assessee. In the case of Infinera India (P.) Ltd. (supra) this tribunal in the case of an Assessee engaged in provision of SWD services for AY 09-10 took the view following the ruling in Cisco Systems (I) (P.) Ltd. v. Dy. CIT [2014] 50 taxmann.com 280/66 SOT 82 (Bang.) took the view that this company was not comparable with a SWD service provider for the reasons given in the earlier part of this paragraph. Respectfully following the precedent on the issue rendered in relation to same AY 2009-10, we direct exclusion of this company from the list of comparable companies. Further, the learned counsel also pointed out that this Hon'ble Tribunal has been consistently holding that in arriving at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of this Hon'ble Tribunal in Infinera India (P.) Ltd. (supra) (paras (4) and 16 at page 8). Respectfully following the precedent on the issue rendered in relation to same AY 2009-10, we direct exclusion of this company from the list of comparable companies. (vii) Sasken Communication Technologies Ltd. The learned counsel for the Assessee submitted that this company is engaged in high-end software products and services that are not similar to the services rendered by the Assessee. It develops and owns several patents and earns returns on the same while the Assessee neither develops nor owns any patents. Moreover, the company incurs significant expenditure on research and development activities and hardware. However, the Asses see is a captive software development service provider and does not undertake development or sale of software products and in turn does not own intangible assets. The company is therefore not comparable to the Assessee. The learned counsel for the Assessee also placed reliance on the decision of this Hon'ble Tribunal in the case of Novell Software Development (India) (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 201/158 ITD 237 (Bang. - Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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