Assessee wins appeal, transfer pricing adjustment negated, revenue's appeal dismissed.

The appeal filed by the assessee was allowed, resulting in the exclusion of the contested comparables and negating the transfer pricing adjustment of Rs. 10,49,16,556/-. The revenue's appeal was dismissed, upholding the directions on foreign currency expenses and foreign exchange gain. The Tribunal's order was pronounced on 17/05/2017.

---

---

Issues Involved:
1. Adjustment under Chapter X of the Income Tax Act, 1961.
2. Fresh benchmarking analysis using non-contemporaneous data.
3. Rejection of comparable companies by TPO.
4. Selection of non-comparable companies by TPO.
5. Inclusion of pass-through costs in margin computation.
6. Exclusion of foreign exchange gain from operating items.
7. Disregard of transfer pricing study report.
8. Tax exemption under section 10A and its impact on transfer pricing adjustments.
9. Reference to TPO without satisfying conditions of section 92C(3).
10. Rejection of multiple year data usage.
11. Denial of +/-5 percent range benefit.

Detailed Analysis:

1. Adjustment under Chapter X of the Income Tax Act, 1961:
The assessee challenged the adjustment of Rs. 10,49,16,556/- made by the TPO and AO under Chapter X, arguing errors in benchmarking analysis and selection of comparables.

2. Fresh Benchmarking Analysis Using Non-Contemporaneous Data:
The TPO conducted a fresh benchmarking analysis using non-contemporaneous data, which the assessee contended was inappropriate and led to an erroneous adjustment.

3. Rejection of Comparable Companies by TPO:
The TPO rejected companies selected by the assessee which undertook similar functions, employed similar assets, and bore similar risks. The assessee argued that this rejection was erroneous and led to an incorrect determination of the Arm's Length Price (ALP).

4. Selection of Non-Comparable Companies by TPO:
The TPO selected companies as comparables that were not functionally similar to the assessee. The assessee specifically contested the inclusion of TCS E-Serve Limited and Wipro Technology Services Ltd., arguing they were functionally different and benefited from brand value, making them incomparable.

5. Inclusion of Pass-Through Costs in Margin Computation:
The TPO included pass-through costs, which were reimbursements for outsourced costs, in the margin computation. The assessee argued these costs should not be included as they distorted the profit margins.

6. Exclusion of Foreign Exchange Gain from Operating Items:
The TPO excluded gains from foreign exchange fluctuations from operating items while computing the margin. The assessee contended these gains were part of the operating revenue and should be included in the margin computation.

7. Disregard of Transfer Pricing Study Report:
The TPO disregarded the transfer pricing study report maintained by the assessee, which was prepared following Section 92D and Rule 10D of the Income Tax Rules, 1962. The assessee argued this led to an incorrect adjustment.

8. Tax Exemption under Section 10A and Its Impact on Transfer Pricing Adjustments:
The assessee claimed tax exemption under section 10A and argued that there was no intention to shift profits outside India, which is a prerequisite for making adjustments under Chapter X.

9. Reference to TPO Without Satisfying Conditions of Section 92C(3):
The assessee argued that the AO referred the matter to the TPO without recording reasons to show that the conditions mentioned in section 92C(3) were satisfied.

10. Rejection of Multiple Year Data Usage:
The TPO rejected the assessee's plea for using multiple year data for comparables, which the assessee argued was permissible under Rule 10B(4).

11. Denial of +/-5 Percent Range Benefit:
The TPO denied the benefit of the +/-5 percent range as per Section 92C(2). The assessee argued this denial was incorrect.

Tribunal's Findings:

Exclusion of TCS E-Serve Limited:
The Tribunal excluded TCS E-Serve Limited from the list of comparables, agreeing with the assessee that it was functionally different and benefited from the TATA brand, which the assessee did not.

Exclusion of Wipro Technology Services Ltd.:
The Tribunal also excluded Wipro Technology Services Ltd., noting it was functionally different, lacked segmental information, and had significant related party transactions, making it incomparable.

Adjustment of Rs. 10,49,16,556/-:
With the exclusion of TCS E-Serve Limited and Wipro Technology Services Ltd., the ALP of the assessee fell within the +/-5% range, negating the need for any TP adjustment.

Directions on Foreign Currency Expenses and Foreign Exchange Gain:
The DRP directed the AO to exclude foreign currency expenses from the total turnover and include foreign exchange gain in the profits eligible for deduction under Section 10A, following the principles laid down in the case of Gem Plus Jewellery.

Conclusion:
The appeal filed by the assessee was allowed, resulting in the exclusion of the contested comparables and negating the TP adjustment. The revenue's appeal was dismissed, upholding the DRP's directions on foreign currency expenses and foreign exchange gain. The Tribunal's order was pronounced on 17/05/2017.

---