TaxTMI 
TaxTMI 
2015 (7) TMI 473
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....ata. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy/electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said that the assessee is primarily engaged in providing ITES to its associated enterprise (AE). Apart from certain reimbursement of expenses, the assessee reported an international transaction of 'Provision of IT enabled data conversion services' with the transacted value of Rs. 129,58,11,907/-. The assessee adopted the transactional net margin method (TNMM) as the most appropriate method for demonstrating that this international transaction was at arm's length price (ALP). On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the ALP of the assessee's international transactions, the latter accepted the TNMM as the most appropriate method. However, the use of multiple-year data was discarded. After considering the Transfer pricing study report along with various objections raised by the assessee during the course of proceedi....
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....to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. The Bench found fallacy in the submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such exchange rate gain arising from exports cannot be viewed differently from sale proceeds. 4.3. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E....
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.... as well as bank interest should have been considered as non-operating in the case of the assessee as well as comparables. The TPO is directed to verify whether the treatment of bank interest and bank charges in the case of the assessee's computation of ALP and that of the comparables is in accordance with our above observations. Needless to say, the assessee will be afforded a reasonable opportunity of being heard. III. PROVISION FOR DOUBTFUL ADVANCES 6.1. The ld. AR contended that the TPO erred in taking Provision for doubtful advances amounting to Rs. 17,11,167/- as operating in its case and provision for doubtful debts as non-operating in the case of the comparables. In the oppugnation, the ld. DR submitted that there is no amount of provision for `doubtful debts' in the case of the assessee for the year in question and the only provision appearing in its books is that of `doubtful advances'. 6.2. Having heard both the sides and perused the relevant material on record, we find that the assessee has not created any provision for `doubtful debts'. The only provision made by it is of `doubtful advances'. Both the provision for bad debts as well as doubtful advances are in....
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....s that the assessee was not having any risk at all inasmuch as its services were to be compensated by the AE with an appropriate mark-up in comparison with the full-fledged risk bearing comparable companies. We are not inclined to accept such a generalized and bald statement. The mere fact that the assessee is a captive unit rendering ITES to its AE alone, does not per se make it a no-risk entity. There are several risks attached to such entities dealing with a single customer. If such lone customer, on whom the enterprise's entire survival depends, closes down its business either voluntarily or due to reasons beyond his control, the possibility of realization of debts for the services already rendered, becomes a potential risk. Further, the fear of termination of agreement between such an enterprise and the solitary customer also poses a grave threat to the existence of such an enterprise. In that sense of the matter, an enterprise serving a single customer, also assumes marked risks. As the assessee is wholly dependent on its AE for securing business, its entire existence also depends on the same AE. If such AE runs out of business or its business is reduced, the assessee is boun....
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..... Firstly, we will deal with the companies which have been included by the TPO in the final set of comparables and the assessee claims them to be incomparable. A submission common to some of such companies was made by the ld. AR that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be automatically excluded from the list of comparables drawn by the TPO. 9.2. We express our reservations in accepting such a broad proposition. It is axiomatic that if company 'A' is functionally different from company 'B', then, such company cannot be considered as comparable. Two companies can be considered as comparable when both are discharging the overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional similarity, many a times a company ceases to be comparable because of other reasons as well. To cite an example, if company 'A', though functionally similar to company 'B', but has related party transactions (RPTs) breaching a particular level, then, such company cannot....
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....sscent Infoserve Pvt. Ltd. during the financial year relevant to the assessment year under consideration. The TPO discussed the functional comparability of this company and, in the ultimate analysis, came to hold that it was functionally comparable with the assessee company and hence includible. 10.1.2. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) ....
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....validation of software item, implementation and data centre management activities. The `Technical services' rendered by this company are in the nature of servicing and maintenance of software. At this stage, it is relevant to note that a company providing software services may be of two types, viz., a company providing software development services and a company providing software services other than software development services (hereinafter also called 'a company providing non-development software services'). In order to properly appreciate the vital difference between these two types of companies, it is significant to note that a company which develops software is called a company rendering software development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a software for obtaining the desired results, is called a company providing non-development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non-development ....
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....r contact services with high operating revenue and peculiar economic circumstances leading to abnormal profits. The TPO repelled the assessee's objections and included it in the final set of comparables. 10.3.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 466 of the paper book. The company's overview has been discussed on page 467 of the paper book, which divulges that this company : "is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services." We find that this company is also providing ITES. Unlike TCS e-Serve International Ltd., this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The ld. AR argued that the natur....
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....ures including its giantness in terms of sales, nature of work and other factors. Thus it follows that L&T Infotech Ltd., which is otherwise a vast company with much higher turnover, finally found the status of a comparable with a captive company providing ITES to its AE alone. 10.3.4. Coming back to the facts of our case, we find that since TCS e- Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/turnover have been brought to our notice. Consequently, we hold that the authorities below were justified in including this company in the list of comparables. iv) i-Gate Global Solutions Sdn. Bhd. 10.4.1. The TPO included this company in the list of comparables despite the assessee's objections about such company offering both IT and ITES services and the peculiar circumstance of amalgamation of i- Gate Global Solutions Sdn. Bhd., with this company during the financial year 2009-10. 10.4.2. We have gone through the Annual report of this company which is available on page 446 onwards of the paper book. Notes to accounts of this company indicate amalgamation of i-Gate Global Solutions Sdn. Bhd. This ....
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....fairly accepted that the above referred three companies were either following calendar year for maintaining their accounts or their figures were for more than 12 months in contrast to the assessee following financial year ending 31st March. It was, however, submitted that these three companies should not have been excluded for this reason alone when they were otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of these companies was not similar to that of assessee company and hence such companies were rightly excluded. 12.1.2. After considering the rival submissions and perusing the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2009 to 31.3.2010. In that view of the matter, a valid comparison can be made only if the comparable companies too have the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: "the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction sh....
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.... not directly available without any apportionment or truncation, then these companies should not be considered as comparable. ii) CG-VAK Software and Exports Ltd. (Seg.) 12.2.1. The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated this company on the ground that it was providing software services and ITES and its turnover from ITES was only 0.83 crore, which was less than the requisite turnover. 12.2.2. Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only Rs. 83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We have noticed above the judgment of the Hon'ble jurisdictional High Court in the case of ChrysCapital Investment Advisors ....
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....fresh decision in accordance with our above observations/directions and also the interest aspect as discussed infra. Apart from the issues discussed in this order, the decision of the TPO on all other aspects of the determination of the ALP of this international transaction should be considered as final, as no other issue has been agitated before us. VI. INTEREST ON DELAYED/NON-REALIZATION OF EXPORT PROCEEDS 13.1. On going through the Master Service Agreement between the assessee company and its AE, it was observed by the TPO that the AE was allowed much longer period for payment than was allowed normally in an uncontrolled situation. The TPO considered the prescription of clause 8.4 of the Agreement which provides that all amounts under this Agreement should be paid within 150 days from the date of invoice. In his opinion, 60 days credit facility is ordinarily given without any interest payment and any delay in payment thereafter was liable to be compensated with interest @ 1.5% to 2% per month on the outstanding amount. The assessee was required to give working of interest on late realization or non-realization of export proceeds during the financial year 2009-10. Such work....
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.... chargeable under the present circumstances on the strength of the judgment in the case of Vodafone India Services Pvt. Ltd. (supra), we find that the point of controversy in that case was quite distinct. Addition on account of the excess share premium was made which, in the opinion of the TPO, should have been received by that assessee from the issuance of shares. It is on this excess share premium short received, that the amount of interest was also charged. The Hon'ble Bombay High Court overturned the opinion of the TPO by holding that the amount of less share premium received over and above the actual premium received cannot be added as TP adjustment because the receipt of premium itself, being a capital receipt, is not chargeable to tax. When the amount of premium is a capital receipt, the Hon'ble High Court held that the so called short premium charged also cannot assume the character of revenue. Apart from the deletion of addition on account of share premium, the Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Union of India and Others (2014) 369 ITR 511 (Bom.) and Shell India Markets P. Ltd. VS. ACIT (2014) 369 ITR 516 (Bom) has held that interest on such....
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.... to be brought to ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. 13.7. The Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, ....
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....essee before us did not charge any interest, the judgment in Cotton Naturals (I) Pvt. Ltd.(supra) rather supports the view canvassed by the Revenue on the basic issue of chargeability of interest. Be that as it may, the amendment to section 92B made with retrospective effect from 1.4.2002 sets the controversy to rest inasmuch as it provides in unambiguous terms that any other debt arising during the course of business is an international transaction. Ex consequenti, transfer pricing adjustment on account of interest income is mandated in case of late/non realization of invoice value from AE. The view canvassed by the ld. AR on this issue is, therefore, found to be devoid of merit and hence jettisoned. 13.11. Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12. In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in e....
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....days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : `(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ...' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if `reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the `contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization....