2016 (1) TMI 598 - AT - Income Tax

Assessee's Appeal Allowed with Exclusions & Directions for Transfer Pricing and Book Profits

The appeal of the assessee was allowed for statistical purposes, with specific directions to exclude certain comparables and treat foreign exchange ... Treatment of foreign exchange fluctuation gain/loss as operating item - Held that:- We direct the AO/TPO to treat the foreign exchange gain/loss as an operating item. Adding back transfer pricing adjustment to income assessed under Section 115JB (MAT) - Held that:- In the present case there is no allegation in the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under Section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act. Issues Involved:1. Non-conformity with DRP directions under Section 144C(13)2. Working capital adjustment3. Alleged non-provision of reliable data4. Transfer pricing addition5. Addition to book profits under Section 115JB6. Rejection of Transfer Pricing Study7. Rejection of comparables selected by the assessee8. Application of various filters by TPO9. Inclusion/exclusion of specific comparables10. Treatment of foreign exchange gain/loss11. Denial of standard deduction benefit under Section 92C(2)12. Initiation of penalty proceedings under Section 271(1)(c)Detailed Analysis:1. Non-conformity with DRP Directions Under Section 144C(13):The assessee contended that the final assessment order passed by the AO was not in conformity with the binding and mandatory directions issued by the DRP, thus rendering the order illegal and non-est. However, this ground was dismissed as not pressed, leaving the question of law open for future consideration.2. Working Capital Adjustment:The AO and TPO erred by not allowing the working capital adjustment as directed by the DRP. The DRP had directed the AO to allow working capital adjustment as per the OECD methodology, which was not adhered to in the final assessment.3. Alleged Non-provision of Reliable Data:The AO and TPO alleged that the assessee did not provide reliable data despite numerous follow-ups. The assessee countered this by stating that they had filed a letter dated 5.12.2014 for recomputing the transfer pricing adjustment in accordance with DRP directions and that there was no burden on them to file any further details before the TPO.4. Transfer Pricing Addition:The AO assessed the total income of the assessee at Rs. 1,18,99,028/- against NIL income returned by the assessee after making a transfer pricing addition of Rs. 1,18,93,486/- for international transactions of software development services provided to its parent company, CashEdge Inc.5. Addition to Book Profits Under Section 115JB:The AO made an addition of Rs. 1,18,93,468/- to the book profits of the assessee for the purposes of Section 115JB, assessing the book profits at Rs. 2,56,61,736/-. The assessee argued that transfer pricing adjustment is not one of the adjustments provided in Explanation 1 of Section 115JB(2) and thus should not be added to the book profits.6. Rejection of Transfer Pricing Study:The AO and DRP erred in rejecting the Transfer Pricing Study of the assessee and conducting a fresh benchmarking analysis based on conjectures and surmises. The assessee had computed the arm's length price using the Transactional Net Margin Method (TNMM) and maintained all required documentation.7. Rejection of Comparables Selected by the Assessee:The AO and DRP confirmed the action of the TPO in rejecting the comparable companies selected by the assessee without providing sufficient reasoning. The assessee argued that the TPO's rejection was arbitrary.8. Application of Various Filters by TPO:The AO and DRP erred in confirming the TPO's application of various filters, such as:- Use of only current year data- Rejecting companies with turnover below Rs. 5 crore- Rejecting companies with less than 75% service income- Rejecting companies with less than 75% export revenues- Rejecting companies with related party transactions exceeding 25%- Rejecting companies with employee costs less than 25% of total cost- Rejecting companies with diminishing revenue/persistent losses- Rejecting companies with different financial year endings- Rejecting R&D filter used by the taxpayer9. Inclusion/Exclusion of Specific Comparables:The assessee contested the inclusion of Persistent Systems Ltd., Wipro Technology Services Ltd., and Zylog Systems Ltd. as comparables. The Tribunal directed the exclusion of Persistent Systems Ltd. and Wipro Technology Services Ltd. due to functional dissimilarity and lack of segmental data. The issue of Zylog Systems Ltd. was set aside for reconsideration by the TPO.10. Treatment of Foreign Exchange Gain/Loss:The Tribunal directed the AO/TPO to treat foreign exchange gain/loss as an operating item, aligning with the decision in the case of Westfalia Separator India Pvt. Ltd. and Fiserv India Pvt. Ltd.11. Denial of Standard Deduction Benefit Under Section 92C(2):The AO/TPO denied the claim of benefit of standard deduction of +/- 5% contained in the proviso to Section 92C(2). The Tribunal's decision on this issue was not explicitly detailed in the provided text.12. Initiation of Penalty Proceedings Under Section 271(1)(c):The AO mechanically initiated penalty proceedings under Section 271(1)(c) without recording adequate satisfaction for such initiation. The Tribunal did not provide a specific ruling on this issue within the provided text.Conclusion:The appeal of the assessee was allowed for statistical purposes, with specific directions to exclude certain comparables and treat foreign exchange gain/loss as an operating item. The AO was also directed to exclude transfer pricing adjustment from the book profits computed under Section 115JB.