TaxTMI 
TaxTMI 
2018 (1) TMI 325
X X X X Extracts X X X X
X X X X Extracts X X X X
....atisfy the arm's length principle envisaged under the Income Tax Act, 1961 ("the Act") and thereby made an adjustment of INR 20,52,63,184 and in doing so have grossly erred by: 1.1. not giving effect to directions of the Ld. DRP in the context of grievances raised in Grounds no. 1.2 and 1.3, herein below; 1.2 erroneously including amount of INR 3,33,10,161 pertaining to ESOPs twice in the operating cost base of the Appellant; 1.3 by treating foreign exchange fluctuation gain/loss as a non-operating item while computing operating margin of the Appellant and of the comparable companies; 1.4. disregarding the arm's length price ("ALP") determined by the Appellant in the transfer pricing ("TP") documentation maintained by it, in terms of section 92D of the Act, by not accepting the economic analysis undertaken by the Appellant and conducting a fresh economic analysis and in particular modifying/rejecting the filters applied by the Appellant; 1.5. The Ld. TPO erred in law in applying certain incorrect filters for selecting comparables, which is contrary to the decisions of the jurisdictional High Court of Delhi; 1.6. excluding certain comparables considered by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee company was incorporated in India and is a subsidiary of ST Microelectronics Pte. Ltd. The assessee filed the return of income on 28.11.2012 declaring an income of Rs. 49,16,03,970/-. Later on, the case was selected for scrutiny. The AO, in respect of international transactions entered into by the assessee referred the matter to the TPO u/s 92CA(3) of the Act. The operating profit margin (OP/OC) was computed by the assessee in the TP study at 11.54%, the average mean margin of the comparables was computed at 11.17%. Accordingly, on the basis of tested party operating profit margin on cost of 11.54%, the international transactions had been considered to be at arm's length in the TP documentation. During the course of proceedings before the TPO, a fresh search was called for and the assessee had given the following comparables: No. Company Name Working Capital adjusted Margin (OP/OC%) i. Akshay Software Tech. Ltd. 11.86 ii. CG VAK Software & Exports Ltd. (Seg.) -14.62 iii. CAT Technologies -4.41 iv. CTIL Ltd. 10.50 v. Cigniti Technologies Ltd. 8.02 vi. Evoke Technologies 12.81 vii. Helios Matheson Information ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ld. DRP directed to exclude the above said comparables on account of difference in FAR. The assessee also sought exclusion of M/s Persistent Systems Ltd., M/s Sasken Communication Technologies Ltd., M/s Zylog systems Ltd. However, the ld. DRP after considering the FAR of the comparables was of the view that there was not any substantive variation to merit exclusion of these entities. Therefore, those were directed to be retained. The assessee also objected to the rejection of the following comparables by the TPO in its final set, the ld. DRP directed as under: Assessee comparable TPO Assessee DRP Directions 1. CG-Vak Software & Exports Ltd. (Software seg.) ('CG-VAK') "In view of the persistent losses and under utilization of human assets, for which no adjustment can be made, this company is rejected." Business circumstances such as incurring losses cannot be sole ground for rejection of a comparable companies. It falls a valid filter, Hence validity Excluded 2. Thinksoft Global Services Limited ('Thinksoft') "The company is functionally different as it is a Low end software service provider, not comparable to Assessee high end function....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which is placed at page nos. 1812 to 1825 of the assessee's compilation). 10. In his rival submissions, the ld. DR strongly supported the orders of the authorities below. 11. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that on a similar issue relating to different financial year, the Hon'ble Jurisdictional High Court in the case of CIT-II Vs Mckinsey Knowledge Centre India Pvt. Ltd. in ITA 217/2014 vide order dated 27.03.2015 held as under: "14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee's financial year....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has charged Rs. 3,33,10,161/- on account of the same, this transaction has been closely linked to the provision of integrated circuit design and software development services by the company for which it has determined the arm's length price using the TNMM as the most appropriate method". Our attention was also drawn towards page no. 325 of the assessee's compilation which is the copy of significant accounting policies and notes on accounts for the year ended 31.03.2012 wherein in para 1.05, the employees benefit cost has been mentioned and it has been stated that company accounts for the staff benefits to its employees are on an accrual basis. The ld. Counsel for the assessee submitted that the amount of Rs. 3,33,10,161/- was deleted from the liability and thereafter liability at the end of the year was determined. A reference was made to page no. 338 of the assessee's paper book which is the working of the liability of ESOP. It was contended that despite overwhelming evidence as per the audited financial statement and in the Form 3CEB supporting the assessee's contention, none of which had been questioned by the TPO who had again loaded the expenses with ESOP liability, despite t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Harbour Notification dated 18.09.2013, the TPO was justified in treating income/loss on account of foreign exchange fluctuation as non-operating cost. 21. We have considered the submissions of both the parties and perused the material available on the record, it is noticed that on a similar issue, the Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd. (supra) held as under: "Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under Section 37(1) of the Income-tax Act, 1961." 22. Now this issue has been settled by the Hon'ble Jurisdictional High Court in the case of Pr. CIT, Delhi-I Vs Ameriprise India Pvt. Ltd. (supra) wherein it has been held as under: "3. The question sought to be urged by the Revenue is whether the ITAT was correct in directing the foreign exchange gain/loss to be considered as an item of operating revenue/cost. 4. The ITAT has in the impugned order noted the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since th....