2013 (2) TMI 726 - AT - Income Tax

Tribunal affirms Transfer Pricing adjustments in international transactions involving software & business support services.

The Tribunal upheld the Transfer Pricing Officer's adjustments in the Arm's Length Price of international transactions, including software and business ... Transfer Pricing Adjustments - Computation of risk adjustment under Rule 10B(4) - Selection of comparables - Determination of Operating Margin - Assessee is working on cost plus basis as a captive service provider to its AE, therefore, it is a risk-free entity. As per the him, the basic economic formula is, take more risk, more profit would be there. Thus, an adjustment on assuming risk should be given. - HELD THAT:- the main section uses the expression 'shall' which make it mandatory to first use the current year data. If certain other circumstances reveals an influence on the determination of transfer pricing in relation to the transaction being compared than other datas for period not more than two years prior to such financial year may be used. The assessee has already assumed critical risk and it is a not a risk free entity. He failed to disclose nature of risks which are to be adjusted. Also, the quantification of the risk adjustment has not been made. Thus, no risk adjustment is to be given to the assessee. - we do not find any error in the appreciation of the facts and circumstances made by the learned DRP on the inclusion of ICRA Online in the comparable list. Exchange fluctuation gain - Capital Receipt or Revenue Receipt? - Assessee had raised external borrowings i.e. ECB loan. On account of fluctuation gain, it received a some amount. The assessee contended that it is a capital receipt, whereas according to the learned AO it is a revenue receipt. - HELD THAT:- Loan was utilized not for the purpose of purchasing capital assets but for other purposes also. If a loss suffered on account of foreign exchange fluctuation is allowable as a revenue expenditure, as per the decision of the Hon'ble Supreme Court in the case of CIT VERSUS M/S WOODWARD GOVERNOR INDIA P. LTD. & M/S HONDA SIEL POWER PRODUCTS LTD. [2009 (4) TMI 4 - SUPREME COURT], then the gain on such fluctuation would also be revenue receipt. Thus treated as revenue receipt. Decision against assesee. Issues Involved:1. Adjustment in the value of international transactions based on the Transfer Pricing Officer's (TPO) recommendations.2. Exclusion of certain comparables from the list for benchmarking international transactions.3. Determination of Arm's Length Price (ALP) for business support services.4. Risk adjustment in the profit margins of comparables.5. Treatment of foreign exchange fluctuation gain as revenue or capital receipt.6. Deduction under Section 10A of the Income Tax Act.7. Levy of interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Adjustment in the Value of International Transactions:The assessee filed its return of income declaring total income under normal provisions and Section 115JB of the Income Tax Act. The case was selected for scrutiny, and the Assessing Officer (AO) referred the matter to the TPO for determining the ALP of international transactions with associated enterprises (AEs). The TPO recommended adjustments in the ALP of two international transactions, specifically in software services and business support services. The Dispute Resolution Panel (DRP) directed the AO to grant a working capital adjustment, leading to adjustments in the business support services segment.2. Exclusion of Certain Comparables:The TPO rejected three comparables (Capital Trust Ltd., Crisil Ltd., and TSR Darashaw Ltd.) based on various grounds, such as the nature of business and related party transactions. The assessee objected to the exclusion of Capital Trust Ltd. and the inclusion of ICRA Online Ltd. with a high-profit margin. The Tribunal upheld the TPO's decision, stating that the functional operations of Capital Trust Ltd. were not similar to the assessee, and the exclusion was justified.3. Determination of ALP for Business Support Services:The assessee adopted the Transactional Net Margin Method (TNMM) for benchmarking its international transactions and selected 11 comparables. The TPO accepted the TNMM method but made adjustments based on the arithmetic mean of the remaining comparables, leading to an adjustment of Rs. 3,48,67,323. The DRP allowed partial relief, reducing the adjustment to Rs. 2,59,19,902.4. Risk Adjustment in Profit Margins of Comparables:The assessee argued for risk adjustment, claiming it operated in a limited risk environment as a captive service provider. The TPO and DRP rejected this claim, stating that the assessee bore significant risks, including human capital-related risks and single customer risk. The Tribunal upheld the decision, noting that the assessee failed to demonstrate the nature of risks faced by comparables and provide a detailed risk adjustment analysis.5. Treatment of Foreign Exchange Fluctuation Gain:The AO treated the foreign exchange fluctuation gain of Rs. 1,90,25,000 as a revenue receipt, not a capital receipt, and denied the deduction under Section 10A. The DRP supported this view, stating that the loan was utilized for purposes other than acquiring capital assets. The Tribunal agreed, referencing the Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd., which treats such gains as revenue receipts.6. Deduction Under Section 10A:The Tribunal rejected the assessee's alternative claim for deduction under Section 10A, stating that the gain from foreign exchange fluctuation was not derived from the business of exporting computer software, thus not qualifying for the deduction.7. Levy of Interest Under Section 234B:The Tribunal noted that the levy of interest under Section 234B is consequential and rejected this ground of appeal.Conclusion:The Tribunal dismissed the appeal, upholding the AO's adjustments and the DRP's directions. The assessee's contentions regarding comparables, risk adjustments, and the treatment of foreign exchange gains were not accepted, and the appeal was found to lack merit.