Tribunal excludes comparables, allows marked-to-market loss claim in transfer pricing adjustment appeal

The Tribunal partially allowed the Assessee's appeal by directing the exclusion of Cosmic Global Limited and Infosys BPO Limited as comparables in the transfer pricing adjustment related to international transactions of Information Technology Enabled Services provided to Associated Enterprises. Additionally, the Tribunal allowed the Assessee's claim of marked to market loss, citing consistency in accounting treatment and relevant legal precedent.

---

---

Issues Involved:

1. Adjustment to the value of international transaction of Information Technology Enabled Services (ITeS) provided to Associated Enterprises (AEs).
2. Exclusion of Cosmic Global Limited as a comparable.
3. Exclusion of Infosys BPO Limited as a comparable.
4. Disallowance of marked to market loss under normal provisions and Minimum Alternative Tax (MAT) provisions.

Issue-wise Analysis:

1. Adjustment to the value of international transaction of Information Technology Enabled Services (ITeS) provided to Associated Enterprises (AEs):

The Assessee challenged the adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) to the value of international transactions related to ITeS provided to its AEs. The adjustment was based on the directions issued by the Dispute Resolution Panel (DRP). The Assessee raised multiple grounds against this adjustment, focusing on the exclusion of certain comparables.

2. Exclusion of Cosmic Global Limited as a comparable:

The Assessee argued for the exclusion of Cosmic Global Limited as a comparable, stating that it is engaged mainly in translation services, which constitutes approximately 96% of its total revenue. The Assessee highlighted that Cosmic Global Limited's business model involves outsourcing its translation services, making it functionally different from the Assessee's operations. The DRP, however, upheld the inclusion of Cosmic Global Limited, noting that the functions of the Assessee are complex and require high skill levels, and that broad functional comparability under the Transactional Net Margin Method (TNMM) is sufficient. The Tribunal, after reviewing the facts, directed the AO to exclude Cosmic Global Limited from the list of comparables, noting that the revenue from translation services, which are outsourced, constitutes a significant portion of its total revenue.

3. Exclusion of Infosys BPO Limited as a comparable:

The Assessee also sought the exclusion of Infosys BPO Limited, arguing that it is a large company with a high brand value and operates in various niche areas like Insurance, Banking, Financial Services, Manufacturing, and Telecom, which are not comparable to the Assessee's routine and simple ITeS. The DRP included Infosys BPO Limited as a comparable, rejecting the Assessee's objections regarding turnover and size. The Tribunal, however, referred to previous decisions, including those of the Bangalore and Delhi Benches, which excluded Infosys BPO Limited due to its functional dissimilarity and the presence of brand value. Consequently, the Tribunal directed the AO/TPO to exclude Infosys BPO Limited from the list of comparables.

4. Disallowance of marked to market loss under normal provisions and Minimum Alternative Tax (MAT) provisions:

The Assessee claimed a marked to market (MTM) loss of Rs. 338.70 lakhs in its Profit and Loss Account. The AO disallowed this loss, relying on CBDT Instruction No.3/2010, which treats MTM losses as notional and contingent. The DRP directed the AO to verify the existence of forward contracts and allow the loss only on actual realization. The Assessee argued that it followed mandatory accounting standards and that the same amount was reversed and offered to tax in the subsequent year. The Tribunal, citing the Supreme Court decision in Commissioner of Income Tax Vs. Woodward Governor India Private Limited, held that the Assessee consistently adopted this policy and allowed the claim of the Assessee. Consequently, the Tribunal allowed the Assessee's appeal on this issue, both under regular assessment and for computing book-profit under Section 115JB.

Conclusion:

The Tribunal partly allowed the Assessee's appeal, directing the exclusion of Cosmic Global Limited and Infosys BPO Limited from the list of comparables and allowing the claim of MTM loss.

---