TaxTMI 
TaxTMI 
2017 (5) TMI 1563
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.... price [ The ALP‟] of International Transactions u/s 92CA made by ld Deputy Commissioner of Income Tax , Transfer pricing officer -2 (2) (2), New Delhi [ Hereinafter referred to as „The TPO‟] vide order dated 29/01/2016 for AY 2012-13. 2. The assessee has raised the following grounds of appeal:- "On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") has erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act") after considering the adjustments proposed by the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer-2(2)(2), New Delhi ("TPO") in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('"DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law: 1. The learned TPO/AO/DRP have erred in making an addition of INR 126,607,828 to the total income of the Appellant in respect of international transaction pertaining to provision of research & information ("R&l")....
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....electing certain companies (which are earning super normal profits) as comparable to the Appellant. 10. The learned TPO / AO / DRP have erred by not considering gains/ losses arising out of foreign exchange fluctuations while computing operating margins of comparable companies even though the same is considered as operating while computing operating margin of the assessee. 11. The learned TPO / AO / DRP have erred in treatment of operating and non-operating items while computing the margins of the Appellant and comparable companies, and passed an order which also suffers from several computational errors in computation of margins of a comparable company (viz. Axis Private Equity Limited). 12. The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in the working capital position of the Appellant vis-a-vis the comparable companies, which is contrary to his finding that the operating margins of the comparables should be adjusted for the differences in level of working capital. 13. The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the....
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....rch and information services of Rs. 1788476202/-, assessee selected 18 comparables whose average of adjusted operating margins was 14.50% on operating cost. Assessee earns operating margin of 15% on operating cost from research and information services transaction, which is higher than the adjusted arithmetic mean of the margins of the comparable companies that is 14.50%. Hence, assessee submitted that research and information service transaction between assessee and its associated enterprise are at arm‟s length. 7. For its provision of IT support services of Rs. 64779181/-, the assessee selected nine comparable companies having average of adjusted operating margin of 14.98% on operating cost. Appellant company earns operating margin of 15% on operating cost from IT support services transactions, it was said that as the operating margin of the assessee is higher than the adjusted automatic mean of the margins of the comparable companies of 14.98%. Hence, IT support services transaction between assessee and its associated enterprises are at arm‟s length. 8. On examination of the transfer-pricing document of the assessee, the Ld. Transfer Pricing Officer mentioned t....
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....e Ld. assessing officer passed final assessment order under section 143 (3) read with section 144C of the Income tax act, 1961 on 25/11/2016 wherein the returned income of the assessee of Rs. 319140070/- was assessed at Rs. 445747898/ - incorporating therein addition as per the transfer pricing adjustment of Rs. 126607828/-. Assessee being aggrieved with the order of the Ld. assessing officer has preferred appeal before us as per grounds of appeal incorporated above. 9. Though assessee has raised 16 grounds of appeal in all however, the Ld. senior advocate appearing on behalf of the assessee submitted that in substance assessee is pressing ground No. 7 of the appeal for exclusion of 3 comparable companies which are functionally not similar to the functions of assessee. He further submitted that ground No. 10 of the appeal is whether the gains or losses arising out of the foreign exchange fluctuation shall be considered as part of operating profit or losses while computing the operating margin of the comparables. He submitted that this issue is squarely covered in favour of the assessee as per Para No. 64 - 68 of the order of the coordinate bench in assessee's own case for as....
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....erms of its agreement with its associated enterprise. He further referred to page No. 6 of order of ld. Transfer Pricing officer wherein employee profile of company is considered. He made a specific reference that Ld. Transfer Pricing Officer has considered employee profile of the McKinsey India and not of assessee and therefore whole discussion about employee profile and its correlation with employee details of assessee becomes irrelevant. After referring to functional profile of assessee and drawing our attention to various reasons stated by Ld. Transfer Pricing Officer, he referred to page No. 483 to page No. 560 wherein the sample copies of request received by assessee from its associated enterprise along with deliverable provided to them. In nutshell, he explained nature of services assessee is providing in this segment. 11. Based on above submission, he stated that out of five comparable companies assessee is objecting to inclusion of three comparables as under. i. Aditya Birla capital advisors private limited ii. Axis private equity Ltd iii. credit information bureau (India) Ltd 12. With respect to Aditya Birla capital advisors private limited, he referred to ....
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....ed same impression. On merits of comparables regarding its exclusion or inclusion, he relied upon order of Ld. Transfer Pricing Officer and Ld. Dispute Resolution Panel. 14. In rejoinder, Ld. senior advocate submitted that it is immaterial whether assessee is classified as KPO or BPO even though coordinate bench has already decided this issue based on order of Hon‟ble high court in assessee‟s own case for earlier year wherein claim of eligibility of deduction under section 10 A of income tax act was decided. He submitted that Hon‟ble Delhi High Court in 361 ITR 85 (Delhi) in Li & Fung India private limited versus CIT has held that even in case of TNMM strict criteria is of independent enterprise, carrying out a comparable transaction, with caveat that this will only be a guide. Indeed, emphasis is very clear on finding a comparable transaction. Therefore he submitted that functional analysis of both the associated enterprise and independent enterprise is required to be determined if the transactions are comparable. Further submitted that even in case of TNMM, standard of comparability for application is not less than application of any other transfer pricing me....
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....ination of arm‟s length price are mentioned. In view of this, it is apparent that for all methods mentioned in rule 10 B (1), four criteria laid down in rule 10 B (2) shall be followed. On examination of income tax act and income tax rules , it is evident that for comparability analysis, information technology enabled services are not bifurcated in strict compass of business process outsourcing (BPO)/ knowledge process outsourcing (KPO) or any other characterization except in case of 10 TC wherein safe harbour rules are provided. Therefore, in our opinion for comparability analysis strictly rule 10 B is required to be complied with. In view of this, though assessee is characterized as knowledge process outsourcing service provider, we would be restricting ourselves in comparing specific characteristics of services, FAR analysis of assessee, contractual terms and economic analysis. While doing so, we are guided by decision of Hon‟ble Delhi High Court in Rampgreen solutions private limited versus CIT 377 ITR 533 wherein it is held that:- "43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerne....
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....aveat that this will be only a guide. Indeed, the emphasis is very clearly on finding a comparable transaction. In addition, a functional analysis of both the associated enterprise and the independent enterprise is required to determine if the transactions are comparable. It might of course be possible to adjust results for minor functional differences, provided that there is sufficient comparability to begin with. The standard of comparability for application of the transactional net margin method is not less than that for the application of any other transfer pricing method." In view of this, we do not find it necessary to accede to the request of Ld. CIT DR to set aside the issue back to the file of the Ld. Transfer Pricing Officer because originally the assessee has also selected comparables based on the criteria laid down under rule 10 B (2) of the income tax rules and while accepting the comparables, the Ld. Transfer Pricing Officer has also looked into the broader functional comparability of the comparables selected and further It is also not apparent from the order of the Ld. Transfer Pricing Officer or from the transfer pricing study report of the assessee that any of t....
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....ion being total imports of goods and services, export of goods and services in foreign exchange reserves from 1990 - 2020 sourced from WMM in excel file. Such details were also included page No. 493 to page No. 549. Another request was shown to us to assessee wherein information of market Had quieter location stock exchange is required with respect to listed companies from Bloomberg. Assessee provided this information from Bloomberg and one source database. Such reports were provided at page number 554 to 560. From these sample requests , it is noted that assessee is subscriber to some database and information is retrieved from these database, indexed in required format, and provided. No further addition in form of opinion, etc, is given. Therefore, it is apparent that assessee is engaged in data retrieval from various software, which is publicly available on payment of subscription. This functional profile is not disputed by revenue. 18. The Ld. Transfer Pricing Officer at page number 4 of his order, further discusses detailed work profile and he has held that research and information services over years, assessee had been showing good margins at net level in this segment. Ther....
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....of this, it was submitted that that functional profile of assessee with this company is incorrect. The Ld. Transfer Pricing Officer rejected contention of assessee and referred to website of Aditya Birla private equity. On basis of this, he held that writ company is not a functionally dissimilar company and process all filters applied by TPO. We have carefully considered rival contentions and perused annual accounts of company placed before us at page No. 445 - 455. According to director‟s report of that company it manages two Aditya Birla private equity funds namely fund - 1 and Sunrise fund. During year it is managing investment agreement to Rs. 2 20 crores in fund No. 1 and 298.62 crores in Sunrise fund. On looking at note No. 11 to profit and loss account, revenue from operation of assessee is management fees from these two funds. According to note No. 16, it is also apparent that company is an investment manager and providing financial advisory services. In revenue recognition, It recognizes its revenue from management fees in accordance with investment management agreement with fund and for this reason, it also incurs distribution cost. On looking at profit and loss acc....
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....d by assessee in research and information services are anywhere similar to functions of a fund manager. In view of decision of coordinate bench in assessee‟s own case for assessment year 2011 - 12 and also on basis of our analysis of functions of assessee vis - a -vis comparable , we direct Ld. Transfer Pricing Officer/AO to exclude Aditya Birla capital advisors private limited for comparability analysis. 20. The next comparable contested is Axis private equity Ltd, whose adjusted margin was 46.49%. The assessee objected a comparable stating that it is functionally dissimilar as it is engaged in business of capital raising solutions and earning supernormal profits. Detailed arguments were stated at page number 605 -608 of paper book The Ld. Transfer Pricing Officer rejected objection of assessee as according to him companies into services relating to research and analytics in area of finance investments and equity due to which expressed eyes and data it provided ultimate services. According to him, profile of assessee matches with this comparable. We have carefully considered rival contentions. We have also perused annual accounts of assessee for financial year 11-12. Acco....
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....cer is pertaining to financial 2012 - 13. These objections are stated at page No. 608 - 609 of the paper book. The Ld. Transfer Pricing Officer held it to be comparable, as it is engaged in providing services which are similar to that that of the assessee and are based on its core functions relating to research and analysis of the credit information being gathered from a strong base of banks, financial institutions, credit card companies, etc therefore according to the Ld. Transfer Pricing Officer, it is a robust comparable. Before us, assessee submitted the same arguments, which was submitted before the Ld. Transfer Pricing Officer strongly objected that in absence of the financial statement of this comparable not provided by the Ld. Transfer Pricing Officer on this ground itself It is required to be excluded. He further submitted that in the earlier years. The coordinate bench has already excluded a credit rating agency ICRA Ltd holding it not functionally comparable with the assessee. He referred to the annual accounts provided at page No. 273 - 444 of the compilation. We have carefully considered the above submission and we are of the view that that CIBIL is a credit rating com....
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....ign exchange (forex) gain/loss as an item of operating nature in the computation of the ALP of both the transactions. The ld. DR. submitted that such forex gain/loss was rightly considered by the TPO as non-operating in the computation of the ALP and hence such a view should not have disturbed. This was opposed by the ld. AR, who contended that forex gain/loss relates to the trading transactions of the assessee and hence the same was operating in the computation of OP/OC under the TNMM. 65. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has not been controverted by the ld. DR that the same is in relation to the trading items emanating from the international transactions. If the foreign exchange gain/loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. 66. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has ....
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....xchange was concerned, the ITAT ruled that the relevant provision, i.e. `Safe Harbour Rules' had not been notified for the concerned assessment year and were, therefore, inapplicable'. Thus the Hon'ble High Court did not disturb the operating nature of forex gain/loss as held by the tribunal. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. The ground taken by the Department is, therefore, dismissed." 25. Ld. departmental representative could not controvert the above fact of the issue already decided in favour of the assessee in earlier years. In view of this respectfully following the decision of the coordinate bench we also hold that foreign exchange gain or loss shall form the part of the operating margin of the assessee. In the result ground No. 10 of the appeal of the assessee is allowed. 26. Coming to ground No. 14 of the appeal of the assessee, which challenges that the inter company receivable arising from the provisions of research and inf....
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....ational transaction" shall include-- (a) ............ (b) ........... (c) capital financing, including any type of long-term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;.... 59. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, the Bench found that apart from any long- term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also becomes international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to....
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....wed as per the Agreement is factored in the price charged for the rendering of services. In the oppugnation, the non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP is required to be determined. Granting of working capital adjustment has been held to be confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services has been held to have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international tra....