ALP in IT-Enabled Data Services: Forex, Interest, and Risk Adjustments Under Transfer Pricing Rules Section 92C

The ITAT Delhi set aside the impugned order and remitted the matter to the TPO/AO for fresh determination of the ALP in the international transaction relating to IT-enabled data conversion services. Forex gain/loss from revenue transactions must be included in operating revenue/cost, while bank interest and charges are to be treated as non-operating expenses for both the assessee and comparables. Provisions for doubtful advances/debts are operating expenses and should be treated similarly for comparables. No risk adjustment was granted due to lack of evidence of higher risk by comparables. Several entities were excluded or included as comparables based on extraordinary financial events or lack of segment-wise data. Interest on delayed export proceeds must be considered for transfer pricing adjustment regardless of the agreement terms, with the interest rate determined by the currency of repayment. The matter was remanded for reconsideration accordingly.

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Issues Involved:
1. Transfer pricing adjustment for IT Enabled data conversion services.
2. Inclusion/exclusion of foreign exchange fluctuation gain/loss.
3. Classification of bank charges.
4. Treatment of provision for doubtful advances.
5. Risk adjustment.
6. Selection of comparables.
7. Interest on delayed/non-realization of export proceeds.

Detailed Analysis:

I. Transfer Pricing Adjustment for IT Enabled Data Conversion Services:
The appeal arises from the final assessment order passed by the AO, which included a transfer pricing adjustment of Rs. 20,48,76,996/- in the international transaction of 'Provision of IT Enabled data conversion services'. The assessee, a wholly owned subsidiary engaged in electronic data conversion, used the transactional net margin method (TNMM) to demonstrate that the transaction was at arm's length price (ALP). The TPO accepted TNMM but discarded multiple-year data, leading to a transfer pricing adjustment based on the arithmetic mean of nine comparable companies.

II. Foreign Exchange Fluctuation Gain/Loss:
The issue pertains to whether foreign exchange fluctuation gain/loss should be included in operating revenue/costs. The Tribunal found merit in the assessee's contention, citing that foreign exchange gain directly resulting from revenue transactions should be considered as operating revenue. The Tribunal referenced several cases, including ACIT Vs Prakash I. Shah and SAP Labs India Pvt. Ltd. Vs ACIT, supporting the inclusion of foreign exchange gain/loss as part of operating revenue/cost.

III. Bank Charges:
The assessee argued that bank charges should be considered non-operating expenses. The Tribunal agreed, noting no significant difference between bank interest (treated as non-operating) and bank charges. The TPO was directed to verify the treatment of bank interest and bank charges in accordance with these observations.

IV. Provision for Doubtful Advances:
The assessee contended that the TPO erred by treating provision for doubtful advances as operating expenses. The Tribunal held that both provision for doubtful debts and advances are operational expenses. The TPO was directed to treat these provisions as operating in the case of comparables as well.

V. Risk Adjustment:
The assessee argued for risk adjustment, claiming it bore no risk as a captive unit. The Tribunal noted that risk adjustment depends on the specific circumstances and the assessee must demonstrate that comparables bore relatively more risks. The Tribunal found the assessee did assume certain risks, including potential realization issues from its AE, and denied the risk adjustment due to the lack of objective demonstration by the assessee.

VI. Selection of Comparables:
The assessee challenged the inclusion of five companies and the exclusion of six. The Tribunal examined each disputed company:

- Accentia Technologies Ltd.: Excluded due to merger during the year.
- TCS E-Serve International Ltd.: Excluded due to involvement in technical services.
- TCS e-Serve Ltd.: Included as functionally comparable.
- i-Gate Global Solutions Sdn. Bhd.: Excluded due to amalgamation.
- Infosys BPO: Excluded due to acquisition during the year.

The Tribunal also remitted the matter of certain excluded comparables back to the TPO for verification of financial data alignment with the assessee's financial year.

VII. Interest on Delayed/Non-Realization of Export Proceeds:
The TPO added Rs. 5.86 crore for interest on delayed/non-realization of export proceeds. The Tribunal upheld the inclusion of interest on delayed payments as an international transaction, referencing the retrospective amendment to section 92B and relevant case law. The Tribunal directed the TPO to recompute the interest adjustment considering the contractual credit period and the currency in which the debt is denominated, following the principles laid out in Cotton Naturals (I) Pvt. Ltd.

Conclusion:
The appeal was allowed for statistical purposes, with directions for the TPO/AO to recompute the ALP and interest adjustments in accordance with the Tribunal's observations. The order was pronounced on 06.07.2015.

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