2018 (9) TMI 1088 - AT - Income Tax

Tribunal Appeal Partially Allowed: Exclusion of Comparables, Forex Treatment Reconsideration, Disallowance Deletion

The Tribunal partially allowed the appeal by directing the exclusion of four comparables, reconsideration of forex treatment as part of operating ... TPA - ALP determination - comparable selection criteria - Held that:- Companies not suitable to be compared with a captive contract software developer like the assessee need to deselected rom final list of comparable. Treatment of forex adjustment - revenue or capital expense - Held that:- Since the issue is no longer res Integra while respectfully following the binding decision of the Special bench in the case of Prakash Shah [2008 (8) TMI 387 - ITAT BOMBAY-K] and other decisions, we hold that the foreign exchange loss or gain arising out of the transaction of revenue nature has to be considered as part of operating profit/cost. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for reconsideration of the ALP afresh Adjustment on account of advance billing - Held that:- As decided in assessee's own case for Asstt. Year 2008-09 issue to be decided in favour of assessee. Adjustment on account of business promotion and conference - Held that:- These business promotion expenses were incurred wholly and exclusively for the purpose of business and were necessitated in view of commercial expediency and are earned year after year. Hence, it is correctly prayed that the same may be allowed as business expenses u/s 37 of the Act - Decided in favour of assessee. Issues Involved:1. Inclusion of four comparables: M/s Cat Technologies Ltd., M/s Infosys Technologies Ltd., M/s Tata Elxsi Ltd., and M/s Thirdware Solutions Ltd.2. Treatment of forex as non-operating item of income/expenditure.3. Adjustment on account of advance billing.4. Adjustment on account of business promotion and conference expenses.Detailed Analysis:1. Inclusion of Comparables:- CAT Technologies Ltd.:The assessee argued that CAT Technologies is non-comparable due to its involvement in medical transcription, training, and BPO services, with no segmental information available. The Tribunal noted the company's diversified activities, including job placement portals, and previous Tribunal decisions excluding CAT Technologies due to its advisory services. The Tribunal directed the TPO to exclude CAT Technologies from the list of comparables.- Infosys Technologies Ltd.:The assessee contended that Infosys is functionally dissimilar due to its high turnover, substantial intangible assets, and diverse services, including product sales. The Tribunal, referencing its own previous decisions and the high turnover of Infosys, concluded that Infosys is not a suitable comparable due to its giant size and diverse operations. The Tribunal directed the exclusion of Infosys from the list of comparables.- Tata Elxsi Ltd.:The assessee argued that Tata Elxsi is engaged in diversified services, including product design and visual computing, with no segmental information available. The Tribunal found that Tata Elxsi's involvement in product development and innovative functions makes it unsuitable for comparison. The Tribunal directed the exclusion of Tata Elxsi from the list of comparables.- Thirdware Solutions Ltd.:The assessee claimed that Thirdware Solutions is involved in diversified services, including software products, with no segmental information available. The Tribunal, considering the company's diverse revenue streams and lack of segmental data, concluded that Thirdware Solutions is not a suitable comparable. The Tribunal directed the exclusion of Thirdware Solutions from the list of comparables.2. Treatment of Forex as Non-Operating Item:The assessee argued that foreign exchange fluctuation income should be treated as an operating item. The TPO and DRP excluded forex gains/losses from operating income, citing Safe Harbor Rules. The Tribunal, referencing the Special Bench decision in ACIT vs Prakash I. Shah and other decisions, held that forex gains/losses arising from revenue transactions should be considered as part of operating profit/cost. The Tribunal directed the AO/TPO to reconsider the ALP, treating forex identically in the calculation of PLI for both the assessee and comparables.3. Adjustment on Account of Advance Billing:The AO disallowed a portion of advance billing, treating it as current liabilities. The assessee cited previous Tribunal decisions in its favor. The Tribunal, referencing its own decisions in the assessee's earlier cases, held in favor of the assessee, directing the deletion of the disallowance.4. Adjustment on Account of Business Promotion and Conference Expenses:The AO disallowed part of the business promotion expenses. The assessee provided detailed submissions showing the expenses were incurred for business purposes. The Tribunal, finding the expenses to be revenue in nature and commercially driven, directed the AO to delete the disallowance.Conclusion:The Tribunal allowed the appeal in part, directing the exclusion of the four comparables, reconsideration of forex treatment, and deletion of disallowances related to advance billing and business promotion expenses. The order was pronounced in the open court on 14th September 2018.