AI Drafter 
TaxTMI 
TaxTMI 
2017 (9) TMI 178
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....rnational transaction pertaining to provision of IT support services rendered by the appellant to its associated enterprise CAE'). 2. The learned TPO / AO / DRP have erred in not accepting the economic analysis undertaken by the Appellant in accordance with provisions of the Income-tax Act, 1961 ('the Act') and modifying the economic analysis for determination of arm's length price ('ALP'), of the inter-company transactions. 3. The learned TPO I AO I DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing ('TP') documentation; and b. Determining the arm's length margins I prices using data pertaining - financial Year CFY') 2008- 09 which was not available to the assessee at the time of complying with the Indian TP documentation requirements. 4. The learned TPO / AO / DRP have erred in rejecting certain companies selected by the appellant by applying inappropriate comparability criteria such as: a. Turnover filter b. Different accounting year 5. The learned TPO / AO / DRP have erred in selecting certain companies (....
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....s of the case, the Learned AO has erred in law and in fact, denying the claim of the appellant in respect of profits derived from export of customisation of data I data processing I back office operations, acting as a support centre as eligible for deduction under section 10A of the Income Tax Act, 1961 ('the Act') read with the Notification No SO 890(E) dated September 26, 2000 issued by the Central Board of Direct Taxes ('CBDT'). 10.1 The Learned AO erred on facts and in law in failing to appreciate: a) that the appellant is an IT-enabled company set up in accordance with the Software Technology Parks scheme of the Government of India and is engaged in rendering IT enabled services being customisation of data / data processing/ back office operations/ acting as a support centre. b) that Software Technology Parks of India ('STPI') confirmed that the appellant is engaged in provision of IT-enabled services in the nature of back office operations, data processing, back office operations data/customization of data and the said activities are covered as export of computer software under the STP scheme. c) that the appellant acts ....
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....The balance 2.87 percent of the income in respect of rendering IT enabled support services is on cost plus 15 percent margin method. 15. The Learned AO has erred on facts and circumstances of the case by contending that the main activities of McKC are support services to McKinsey & Co. including providing support research analysis and information services which cannot be categorised as IT Enabled Services. 16. The order of the Learned AO is bad in law, contrary to the principles of natural justice, principle of consistency and is liable to be quashed. 17. That on facts and circumstances of the case and in law, the Learned AO erred in charging interest under section 234B, section 234C and section 234D of the Act at INR 147,784,380; INR 860,706 and INR 946,875 respectively. 18. Based on the facts and circumstances of the case, the Learned Assessing Officer has erred in fact and in law in proposing to initiate penalty proceedings under section 271 (1 )(c) of the Act against the appellant." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the assessee company is a wholly owned subsidiary of McKinsey Holding I....
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....its international transaction. 8. Ld. TPO to benchmark the international transactions undertaken by the assessee in question applied filters to the following effect :- "(a) Companies whose data is not available for the F.Y. 2008-09 are to be excluded; (b) Companies whose IT Support Services income is less than Rs. 1 crore are to be excluded; (c) Companies that were declared sick or had persistent negative net worth are to be excluded; (d) Companies that have ceased business operations or inactive are to be rejected; (e) Companies whose revenue from Services is less than 75% of the total operating revenues are to be excluded; (f) Companies that have export sales of less than 75% of sales for ITES are to be excluded; (g) Companies that have diminishing revenues/persistent losses for the last three years up to and including F.Y 2008-09 are to be excluded; (h) Companies that have substantial transactions [>25%] with related parties are to be excluded; (i) Companies that had exceptional year(s) of operation are to be excluded; (j) Companies having different financial year ending (i.e. not March ....
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....s, "comparable companies whose IT Support services income is less than Rs. 1,00,00,000/- are to be excluded." Issue as to adopting filter by the ld. TPO less than Rs. 1,00,00,000/- has been dealt with by the Hon'ble High Court in assessee's own case for AY 2006-07 in ITA 217/2014 judgment dated 27.03.2015 by returning the following findings :- "13. So far as the Arms Length Price (ALP) determination and the Transfer Pricing upward adjustments, are concerned, in its TP documentation, the assessee determined Transactional Net Margin Method (TNMM) as the most appropriate method to determine the ALP of the international transaction pertaining to the provision of IT support services. The TPO in the order accepted only 7 out of the 11 comparable companies and rejected the rest based on reasons that one of them, Fortune Infotech Ltd. ("FIL") had a different financial year ending, the other two - Kirloskar Computer Services Ltd ("KCSL") and Mercury Outsourcing Management Ltd. ("MOML") had a turnover of less than Rs. 1 Crore and finally, Genesis International Corporation Ltd ("GICL") was rejected because it seemingly had a negative growth graph. 14. The Revenue is in appea....
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....o the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and the Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method." Rule 10B (3) stipulates the third step, and spells out when the TPO is obliged to hold an uncontrolled transaction as comparable with o....
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....sidered view that this comparable company is a suitable comparable company and consequently, this issue is remanded to the ld. TPO to benchmarking the international transaction in question by including this comparable in the final set of comparables by verifying the quarterly results available in the public domain as this company is a listed company. So, we determine Ground No.6.2 in favour of the assessee for statistical purposes. GROUND NO.7 15. Ld. AR for the assessee challenging the impugned order contended that the AO has committed computational error in the margin of the comparable companies for benchmarking the international transactions despite the fact that this issue was raised before ld. DRP and a specific order was passed in this regard. For facility of reference, argument addressed by ld. AR before the ld. DRP and findings thereof are reproduced for ready perusal as under :- "10.1 The assessee has pointed out certain 'computational error in margins of assessee and comparables. The assessee has pointed out that whereas FBT has been excluded for computation of margin in case of comparables, it has been included in case of the assessee. Further, uniform....
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....ed in the table above) of McKC." 17. Strangely enough, even application filed on 03.04.2013 has not been disposed off to exclude the FBT in case of assessee as the same has been excluded while computing the margins of comparable companies. Even, ld. Senior DR attending the case for the last three years has not preferred to direct the quarter concerned to comply with the directions issued by higher Revenue Authorities, the ld. DRP in this case. This is a case of complete lack of empathy and voluntarism on the part of lower Revenue Authorities by not complying with the order of the higher authorities. So, we hereby direct the TPO/AO to comply with the directions issued by the ld. DRP to exclude FBT while computing the margins of assessee as has been done in case of comparable companies to arrive at a correct computation of the margins of assessee as well as comparable companies. So, ground no.7 is determined in favour of the assessee for statistical purposes. GROUND NO.8 18. Ld. AR for the assessee challenging the impugned order contended that TPO/AO/DRP have erred in not considering gains/losses arising out of foreign exchange fluctuations while computing the operating marg....
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....acter 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 fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. 67. 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 Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. 68. The reliance of the ld. DR on Safe Harbour rules to contend that foreign exchange gain or loss be taken as non-operating, is not sustainable. There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is relevant to note tha....