Transfer pricing comparables, operating foreign exchange gain and tax credit claims were dealt with in favour of the assessee

Persistent loss filter cannot justify exclusion of a comparable unless it shows losses throughout the relevant successive years; comparables lacking functional similarity, similar turnover, segmental data, or free from extraordinary events may be excluded instead, and the two loss-year comparables were directed to be included while dissimilar comparables were excluded. Foreign exchange fluctuation gain arising from realization of export-service receivables is operating income for transfer pricing purposes and was so treated in computing the profit level indicator. Risk adjustment was not decided on merits and was remitted for fresh examination. Credit for self-assessment tax and tax collected at source was to be granted subject to verification.

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Issues: (i) Whether comparables could be excluded on the basis of persistent loss filter and functional dissimilarity for transfer pricing purposes; (ii) whether foreign exchange fluctuation gain was operating in nature for computing the profit level indicator; (iii) whether risk adjustment required reconsideration; and (iv) whether credit of self-assessment tax and tax collected at source was to be allowed.

Issue (i): Whether comparables could be excluded on the basis of persistent loss filter and functional dissimilarity for transfer pricing purposes.

Analysis: The comparables excluded by the lower authorities did not suffer continuous losses in the relevant three-year period, as profit was recorded in one of the years, and therefore they could not be rejected merely on the basis of a persistent loss filter. The comparables introduced by the transfer pricing authorities were found to be functionally dissimilar to the assessee, to have significant turnover differences or extraordinary events, and to lack segmental information for software development services.

Conclusion: The exclusion of the two loss-year comparables was set aside and they were directed to be included, while the functionally dissimilar comparables were directed to be excluded. The issue was decided in favour of the assessee.

Issue (ii): Whether foreign exchange fluctuation gain was operating in nature for computing the profit level indicator.

Analysis: Foreign exchange gains arose from realization of receivables connected with the core export of services and were directly linked to the assessee's business operations. Such gains were therefore part of operating income for transfer pricing computation.

Conclusion: Foreign exchange fluctuation gain was held to be operating in nature. This issue was decided in favour of the assessee.

Issue (iii): Whether risk adjustment required reconsideration.

Analysis: The claim for risk adjustment was not finally adjudicated on merits and required examination by the lower tax authorities in accordance with law.

Conclusion: The issue was restored to the file of the Assessing Officer and the Transfer Pricing Officer for fresh consideration.

Issue (iv): Whether credit of self-assessment tax and tax collected at source was to be allowed.

Analysis: The assessee was entitled to credit of tax paid and tax collected at source subject to verification as per law.

Conclusion: The credit claims were directed to be granted after due verification. This issue was decided in favour of the assessee.

Final Conclusion: The transfer pricing adjustment was reduced on the identified issues, certain comparables were excluded while others were restored or included as directed, and the assessment was required to be modified accordingly.

Ratio Decidendi: A comparable cannot be excluded on a persistent loss filter unless it has incurred losses in all the relevant successive years, and foreign exchange gains arising directly from export/service receivables constitute operating income for transfer pricing purposes.

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