2014 (5) TMI 475 - AT - Income Tax

Tribunal Adjusts Margins, Excludes Comparable, Dismisses Jurisdiction Challenge.

Techbooks International Pvt. Ltd. Versus Assistant Commissioner of Income Tax

Techbooks International Pvt. Ltd. Versus Assistant Commissioner of Income Tax - TMI Issues Involved:1. Lack of Jurisdiction2. Rule of Consistency3. Foreign Exchange Fluctuation Gain/Loss4. Inclusion of Coral Hub Ltd. in ComparablesDetailed Analysis:I. Lack of Jurisdiction:2.1. The first issue raised by the assessee is the non-discharging of the statutory onus by the Assessing Officer (AO) under clauses (a) to (d) of section 92C(3) of the Income-tax Act, 1961. The assessee argued that the AO failed to establish that the case fell under any of these clauses, which is a pre-condition for determining the Arm's Length Price (ALP) of international transactions. The AO's failure to form an opinion on these clauses vitiated the entire exercise of determining the ALP and the resultant transfer pricing addition.2.2. The tribunal noted that section 92C(3) requires the AO to form an opinion based on material or information in his possession. However, section 92CA allows the AO to refer the computation of ALP to the Transfer Pricing Officer (TPO) with the previous approval of the Commissioner. Instruction No. 3 of 2003 mandates scrutiny and reference to the TPO if the aggregate value of international transactions exceeds Rs. 5 crore. The tribunal cited the Delhi High Court's judgment in Sony India (P) Ltd. vs. CBDT, which held that the AO needs only a prima facie opinion to make such a reference, not a detailed satisfaction.2.3. The tribunal emphasized the safeguards provided by the legislature: the AO's reference to the TPO requires the Commissioner's approval, the TPO gives the assessee an opportunity to show cause, and the assessee can challenge the draft order before the Dispute Resolution Panel (DRP) and subsequently appeal to the tribunal. These safeguards negate the need for additional protection through detailed satisfaction by the AO.2.4. The tribunal rejected the assessee's reliance on the Sony India case, noting that the requirements of section 147 (related to reopening assessments) cannot be applied to section 92. The assessee's case falls under section 92CA, not section 92C, and the Delhi High Court's judgment in Sony India is binding.2.5. The tribunal dismissed the assessee's contention that the AO did not form an opinion before making the reference to the TPO, as there was no evidence to support this claim. The prescribed procedure is presumed to have been followed unless explicitly shown otherwise.II. Rule of Consistency:3.1. The assessee argued that no transfer pricing adjustment was required for the current year as the ALP for the preceding year was accepted by the authorities. The assessee cited the Supreme Court judgments in Radhasoami Satsang vs. CIT and CIT vs. Excel Industries Ltd. to emphasize the rule of consistency.3.2. The tribunal acknowledged the rule of consistency but noted that it applies only if there is no change in the factual or legal position. The tribunal highlighted that the determination of ALP involves several factors that can change from year to year, such as profit margins and comparables. The tribunal rejected the assessee's contention, stating that the acceptance of ALP in one year does not preclude authorities from determining ALP in subsequent years.III. Foreign Exchange Fluctuation Gain/Loss:4.1. The assessee contested the exclusion of foreign exchange fluctuation gain/loss from operating revenue/cost by the TPO.4.2. The tribunal noted that the assessee earned revenue from IT-enabled data conversion services and chose the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating profit to Total Cost. The TPO accepted TNMM but excluded foreign exchange fluctuation gain/loss from operating revenue/cost.4.3. The tribunal found merit in the assessee's contention that foreign exchange fluctuation gain/loss should be included in operating revenue/cost, as it directly relates to the revenue earned from international transactions.4.5. The tribunal cited the Special Bench of the Tribunal in ACIT vs. Prakash I. Shah, which held that foreign exchange fluctuation gain/loss from export is an integral part of export proceeds. The tribunal also referred to the Bangalore Bench in SAP Labs India Pvt. Ltd. vs. ACIT, which held that foreign exchange fluctuation gain is part of operating profit.4.9. The tribunal set aside the impugned order and remitted the matter to the AO/TPO to recompute margins by considering foreign exchange fluctuation gain/loss as part of operating revenue/cost.IV. Inclusion of Coral Hub Ltd.:5.1. The assessee objected to the inclusion of Coral Hub Ltd. (formerly Vishal Information Technologies Ltd.) as a comparable, arguing that it had a different business model involving outsourcing activities and owning significant intangibles, with a minimal employee cost ratio.5.2. The tribunal rejected the contention that Coral Hub Ltd. should be excluded based on the previous year's exclusion due to related party transactions exceeding 25%. The tribunal noted that the basis for exclusion in the preceding year was not applicable for the current year.5.3. However, the tribunal found that Coral Hub Ltd. had a different business model with a significantly lower employee cost ratio compared to the assessee. The tribunal referred to its order in the assessee's own case for the assessment year 2007-08, where Coral Hub Ltd. was held to be incomparable due to its different business model.5.5. The tribunal followed the principle of stare decisis and directed the exclusion of Coral Hub Ltd. from the list of comparables, as the facts and circumstances for the current year were similar to those of the assessment year 2007-08.Conclusion:The tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to recompute margins by including foreign exchange fluctuation gain/loss in operating revenue/cost and excluding Coral Hub Ltd. from the list of comparables. The tribunal dismissed the lack of jurisdiction and rule of consistency contentions raised by the assessee.