2015 (10) TMI 485 - AT - Income Tax

ITAT Decision: Inclusion of Comparables, Foreign Exchange Gain/Loss, Arm's Length Price, Interest

M/s. iPass India Pvt. Ltd. Versus Income Tax Officer, Ward 11 (2), Bangalore.

The ITAT partly allowed the assessee's appeal by excluding certain comparables from the list and dismissed the Revenue's appeal. The decision upheld the ... Interest under Section 234D - Held that:- The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala [2001 (10) TMI 4 - SUPREME Court]. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234D of the Act, if any, while giving effect to this order. - Decided against assessee. Transfer pricing adjustment - Exclusion of Comparables Sought for by the assessee - Held that:- Bodhtree Consulting Ltd. (‘Bodhtree’) - We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (2014 (11) TMI 849 - ITAT BANGALORE) for Assessment Year 2009-10, following the decisions of the Mumbai Benches of the ITAT in Nethawk Networks Pvt. Ltd. [2013 (11) TMI 967 - ITAT MUMBAI ] and Wills Processing Services (I) Pvt. Ltd. [2014 (4) TMI 814 - ITAT MUMBAI] had omitted this company from the list of comparables to a software development service provider as it was established to be in software product company. Infosys Technologies Ltd. (‘Infosys’) be omitted from the list of comparables to a mere software development service provider since it was found to be functionally dis-similar and different, being a market leader engaged in software products, owned significant IPRs and intangibles, had significant R&D activities, brand attributable profits etc. Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO India Pvt. Ltd. (2014 (11) TMI 849 - ITAT BANGALORE) for Assessment Year 2009-10, we hold that ‘Infosys’ cannot be regarded as a comparable to a captive software development service provider, like the assessee in the case on hand, and consequently direct the Assessing Officer / TPO to exclude this company from the list of comparables. Tata Elxsi Ltd. (Seg.) being into software development service segments such as embedded product design services, industrial design and engineering services, systems integrating services, Visual Computing Labs , etc. cannot be regarded as comparable to a pure software development service provider, like is the assessee in the case on hand. Foreign Exchange Gain/Loss - computation of operating revenue - Held that:- It has not been disputed that the foreign exchange gain/loss has arisen as a consequence of the realization of the consideration for rendering software development services and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. Following the decision of Triology E Business Software India Pvt. Ltd. (2013 (1) TMI 672 - ITAT BANGALORE ) and Amba Research India Pvt. Ltd. (2015 (10) TMI 461 - ITAT BANGALORE), we hold that operating revenue should be computed by including the foreign exchange gain/loss. - Decided against revenue. Issues Involved:1. Adjustment to the arm's length price (ALP) of payments made by the assessee to its Associated Enterprise (AE).2. Use of single year data versus multiple year data for determination of ALP.3. Rejection of certain comparables based on different quantitative and qualitative filters.4. Computation of working capital adjustment.5. Risk profile adjustments.6. Benefit of +/-5 percent under the proviso to section 92C(2) of the Act.7. Imposition of interest under Sections 234D of the Act.8. Initiation of penalty proceedings under section 271(1)(c) of the Act.9. Treatment of foreign exchange gain/loss as operating in nature.Detailed Analysis:1. Adjustment to the ALP of Payments to AE:The assessee contested the addition of Rs. 1,95,59,772 made by the Assessing Officer (AO) / Transfer Pricing Officer (TPO) on account of adjustment to the ALP of payments made to its AE for software development services. The ITAT upheld the CIT(A)'s decision to include only three comparables in the final set selected by the TPO, namely Bodhtree Consulting Ltd., Infosys Technologies Ltd., and Tata Elxsi Ltd.2. Use of Single Year Data:The CIT(A) upheld the AO/TPO's use of single-year data (FY 2008-09) instead of multiple-year data as applied by the assessee in the transfer pricing documentation. The ITAT did not find merit in the assessee's plea and dismissed this ground.3. Rejection of Certain Comparables:The CIT(A) upheld the AO/TPO's rejection of certain comparables based on different quantitative and qualitative filters. The ITAT found that the TPO's selection of comparables was appropriate and dismissed the grounds raised by the assessee regarding the rejection of comparables based on accounting year, consolidated results, employee cost, and export sales criteria.4. Computation of Working Capital Adjustment:The CIT(A) considered incorrect receivables and payables in computing the working capital adjustment and restricted the benefit to 1.71 percent. The ITAT did not find any error in the CIT(A)'s approach and upheld the decision.5. Risk Profile Adjustments:The CIT(A) did not make suitable adjustments to account for differences in the risk profile of the assessee vis-`a-vis the comparables and concluded that once the working capital adjustment is granted, no further adjustments are necessary. The ITAT upheld this decision.6. Benefit of +/-5 Percent:The CIT(A) computed the ALP without giving the benefit of +/-5 percent under the proviso to section 92C(2) of the Act. The ITAT did not find merit in the assessee's plea and dismissed this ground.7. Imposition of Interest under Sections 234D:The assessee denied liability to be charged interest under Section 234D of the Act. The ITAT upheld the AO's action in charging interest, stating that it is consequential and mandatory.8. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The ITAT found this ground not maintainable as no penalty had been levied, and dismissed it accordingly.9. Treatment of Foreign Exchange Gain/Loss:The Revenue contested the CIT(A)'s decision to treat foreign exchange gain/loss as operating in nature. The ITAT upheld the CIT(A)'s decision, stating that foreign exchange gain/loss arising from the realization of consideration for rendering software development services should be included in the operating revenues for calculating the operating margin.Conclusion:The ITAT partly allowed the assessee's appeal by excluding Bodhtree Consulting Ltd., Infosys Technologies Ltd., and Tata Elxsi Ltd. from the list of comparables. The Revenue's appeal was dismissed, upholding the CIT(A)'s decision to treat foreign exchange gain/loss as operating in nature. The ITAT directed the AO/TPO to recompute the ALP and interest chargeable under Sections 234D of the Act, if any, while giving effect to this order.