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2021 (3) TMI 803
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.... of the Appellant pertaining to provision of software development services to it's Associated Enterprises (AEs) by rejecting the analysis undertaken in its transfer pricing documentation for determination of the arm's length price. 2. Inappropriate use of contemporaneous data and use of single year data Erred on the facts and in circumstances of the case and in law by determining the arm's length margin using contemporaneous and single year data (AY 2014-15) which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 3. Inappropriate application/modification of certain qualitative and quantitative filters Erred on the facts and in circumstances of the case and in law by introducing modifying certain additional filters to reject the comparable companies identified by the Appellant in its TP report. 4. Inappropriately considering gain/loss arising on account of foreign exchange fluctuation as non-operating in nature while computing the operating margins of the Appellant and comparables Erred on the facts and in circumstances of the case and in law by treating ....
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....in law by incorrectly computing Income from business or profession and consequent tax demand in notice of demand accompanying final assessment order. 12. Erroneous levy of interest Erred on facts and in circumstances of the case and in law by levying interest under sections 234A, 234B, 234C and 234D of the Act. 13. Penalty proceedings under section 271(1)(c) of the Act on additions made to the total income Erred in initiating penalty proceeding under section 271(1)(c) of the Act without considering the fact that adjustment to the income of the Appellant is mainly on account of difference of opinion and interpretation of provisions between the Appellant and the learned AO/ Transfer Pricing Officer." 2. At the very outset, referring to the grounds of appeal, the Ld. Counsel for the assessee submitted that the assessee is not pressing Ground Nos. 2, 3, 7, 8 and 11. After recording the submissions of the Ld. Counsel, these grounds are dismissed as "not pressed." 3. Ground No.1 is general in nature, Ground Nos. 10 & 12 are consequential and Ground No.13 is premature. Hence, these grounds do not call for any adjudication. 4. The brief facts of....
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....change gains/losses as non-operating revenue. In this regard, it is pertinent to point out that Foreign Exchange gain/loss occurs in the following two situations: i. Receipts/expenses are booked at the time of carrying out the transaction whereas the actual receipts/payments of foreign exchange occurs at a later point of time resulting in Foreign exchange gain/loss due to variation in the exchange rate from the date of transaction to that of date of actual receipt/payment. ii. An exporter/ importer enters into forward contract for sale/purchase of foreign exchange to hedge itself from the fluctuation in exchange rates. In the first situation mentioned above, the foreign exchange gain/loss is solely attributable to the variation in exchange rate during the period from the date of carrying out the transaction to the date of actual receipt/payment and therefore the operations of the assessee have no direct bearing on such gain/loss. There is no direct/immediate nexus between the operations of the assessee and the foreign exchange gain/loss. The fluctuations in the rate of foreign exchange which result in such gain/loss are in turn caused by the macro-economi....
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....g revenue/expense for the computation of PLI, the actual receipts/payments are substituted in place of the sale price or purchase price charge on the date of transfer and the PLI so computed would reflect the net margin prevalent at the time of realization/payment rather than the net margin at the time of sale or purchase. Hence, the treatment of FE gain/loss as operating for the purpose of computing the PLI of the tested party and the comparables causes distortions in the comparability analysis. Further, when the FE gain/loss is included in the operating revenue/expenses, part of the gain/loss would pertain to the transactions of sales /purchases made during the earlier year in respect of which the actual receipts/payments took place during the instant year. The net margin so computed therefore does not reflect the correct net margin arising from the sale/purchase transactions that have taken place during the year for carrying out a reliable comparability analysis. The inclusion of FE gain/loss in the operating revenue would result in distortion of net margins of the tested party and the comparable companies making the comparability analysis unreliable, which is ....
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....39;ble ITAT have held that the foreign exchange fluctuation gain/loss should be treated as Operating income/cost. However, we find that in the case of M/s. DHL Express (India) (P) Ltd., [2011] 11 taxmann.com 40 the hon'ble ITAT Mumbai laid down the principle that the foreign exchange gain/loss has nothing to do with the main operations of the assessee and therefore the same represents a non-operating income/loss which needs to be excluded for the purpose of benchmarking the international transaction. Thus, we find that there is no judicial consensus on the issue of the treatment of gain/loss arising from foreign exchange rate fluctuation in respect of transactions carried out during the course of business. There is no decision of the Hon'ble Supreme court so far on this issue. As regards decision cited by the assessee, however, no evidence is brought on record that this decision is accepted by the Department on merit. As the decision is pending before the higher forums for adjudication and has not reached a finality and considering the decision of Jurisdictional ITAT on the matter as discussed above and considering the need for keeping the issue alive until such time the ma....
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....ncy 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 fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. What is true for exports is also true for other items of expenses/income of revenue nature. 22. 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 several ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd. 20 decisions including Trilogy E Business....
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....d the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non-operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise (AE) and the Assessee stated that for the specified products and services provided by the Assessee, it "shall raise invoices on Ameriprise USA on the basis of a cost plus pricing methodology." The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non-operating cost." 9. Further, the Ld. Counsel for the assessee has also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Ameriprise India (P) Ltd. Vs. Assistant Commissioner of Income Tax, New Delhi (2015) 62 taxmann.com237 ( Delhi- Trib), wherein the Delhi Bench of the Tribunal on the same issue has held as follows: "16.1 The second issue taken up before us is against treating foreign exchange differences as non-operating as against the assessee‟s ....
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.... taken in Trilogy E Business Software India (P) Ltd. v. Dy. CIT[2011] 12 taxmann.com 464/47 SOT 45 (URO)(Bangalore). The Mumbai Bench of the Tribunal in S. Narendra v. Addl. CIT [2013]. 32. taxmann.com 196/57 SOT 32 has also laid down to this extent. 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 of the assessee as well as comparables. We, therefore, hold that the AO was not justified in considering forex loss as non-operating cost as against the assessee's claim of operating cost." That therefore going by the aforesaid plethora of judicial pronouncements, this issue is answered in favour of the assessee and the TPO/AO is directed to determine the ALP of the international transactions afresh after considering forex gain/loss as operating in nature. Thus, Ground No.4 raised in appeal by the assessee is allowed. 10. In Ground No.5, the assessee is aggrieved with the rejection of certain companies from the set of comparables identified by the assessee in the TP report in respect of international trans....
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....t as per the statement of accounts placed on record as on 31.03.2012, it has earned foreign exchange realization profit. 15. We observe similarly, the Mumbai Bench of the Tribunal in the case of Goldman Sachs (India) Securities (P) Ltd. Vs. ACIT (OSD) in ITA No.7724/Mum/2011 vide Para 19 of the said order it was observe that "the Company Capital Trust was taken as comparable by the assessee but it was rejected by the TPO because for the two out of the last three years taken into consideration, the company had a loss. The Tribunal further observed that "there was no difference of business of this company with that of the assessee and that in such circumstances, if a company has suffered loss in a particular year that cannot disqualify it as a legitimate comparable." 16. That further, going by the submissions of the Ld. Counsel for the assessee that Cat Technologies Limited is persistent loss making company only, if forex is taken as non-operating in nature. However, in the foregoing paragraphs while deciding Ground No.4 in this appeal, we have already arrived at the findings that forex has to be taken as operating in nature. In such scenario, the Ld. Counsel did submit that Ca....
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....y can be established with reference to various factors. Apart from filters, it is essential to consider the nature of business of the company and other qualitative information, such as, related party transactions, mergers and acquisition etc. if any and the detailed composition and manner of revenue recognition, which predominantly help in deciding the comparability. Such qualitative information can be obtained only from the Annual Report of the company for the relevant year. Simply relying on the quantitative figures for the year under consideration with reference to the Annual Report of the company for the succeeding year does not in any manner assist in deducing the qualitative information and the resultant comparability. It is a matter of record and admitted position that the assessee did not furnish Annual Report of the Company before the Authorities below which could have assisted them in ascertaining the comparability of this company with that of the assessee. The same position is continuing before the Tribunal as well. Since the assessee failed to prove the comparability with reference to the Annual Report of this company, we are satisfied that the Authorities below were ju....
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....ces there was an increase in such expenses and it is only submitted that the lower profit in this year may be attributed to the facts mentioned above. Since the assessee has failed to properly justify that the increase in such expenses is not due to the relocation factor, therefore, this objection cannot be accepted." 22. Having heard the rival submissions and gone through the relevant material on record, it is observed that the TPO ordered exclusion of this company from the final list of comparables on the ground that it had `peculiar economic circumstances‟ during the year under consideration in the sense of relocation of its SEZ unit and further, compensation received for this purpose was excluded by the assessee from the computation of the operating income of this company. As against that, we find from Note No.14 to the Annual accounts of this company that it obtained permission for relocation of its SEZ unit from L&T, Arun Excello, IT SEZ Vallanchery Village, Guduvenchery to Sector specific IT/ITES SEZ of DLF Info City Developer vide communication dated from 25.02.2013. It has been specifically mentioned that "Unit was physically moved during June 2014". The assessmen....
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....N/2018 for assessment year 2014-15 dated 17.02.2020, wherein the facts were identical to the case of the assessee and in this case also, Persistent Systems Limited was sought to be excluded as comparables to the software development service segment of the assessee. That in the above referred case, it was submitted by the assessee that Persistent Systems Limited has been rejected by the Revenue Authorities as functionally non comparable to software development service provider in past years before various Forums. It was also submitted that Persistent Systems Limited has derived revenue from licensing of software products, products engineering and royalty but however, breakup of the same in revenue from software services is not available. The Tribunal while deciding this issue has placed reliance on the decision of the Hon‟ble Delhi High Court in the case of Pr. CIT Vs. Saxo India Pvt. Ltd., ITA No.682/2016 and held as follows: "11. We have perused the case records and heard the rival contentions. We observe that the company i.e. Persistent Systems Limited is functionally different as it is engaged in rendering IT services and in the development of software products wi....
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....The company has made significant investment in IP and their solutions and has a dedicated team for Research and IP development. The learned Authorised Representative relied on decision of Tribunal in the case of CGI Information & Management Systems Pvt. Ltd. Vs. ACIT 94 Taxman.com 97 and PCIT Vs. Saxo India Pvt. Ltd. 74 taxmann.com 88 (Delhi). We relied on the decision of CGI Information Systems & Management Consultants Pvt. Ltd.(supra) at paras 28 to 30 as under : 28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the IT AT Delhi Bench in the case of Agilis Information Technologies India (P.) Ltd. v. Assn. CIT [2018] 89 taxmann.com 440 (Delhi - Trib.) for the same AY 2012-13. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also....
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.... software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order. 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a ....
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...., Chennai in the case of Symantec Software & Services India (P) Ltd. vs. DCIT 79 taxmann. com (Chennai-Trib.) wherein it was held as follows: "10. We heard the rival submissions, perused the material on record. We found that the company is engaged in product development and cannot be comparable to the software development services and has income from license fee. The Revenue Recognition Policy in notes of accounts and segmental information is available in respect of infrastructure and systems, telecom and wireless life sciences and Health care. Further, it renders services in cost plus to its Associate Enterprise and sail with partnership and alliances, intellectual property led solutions and end-to end solutions, strategic acquisitions and financial year 2010-11 is an exceptional year of operation of Persistent Systems. We find support from the decision of 3DPLM Software Solutions Ltd. (supra) at para 17 Page 13 of the paper book as under: "17. Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reason that this company being engaged in softwar....
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....s seen from the details on record that this company i.e., Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis. We hold that this company, i.e., Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." We rely on the above facts and Tribunal decision and we direct the TPO to exclude Persistent Systems Ltd. from the list of comparable companies". 10.2 Further, the Ld. AR relied on the order of the ITAT, Delhi in the case of M/s. Alcatel-Lucent India Ltd. vs. Addl. CIT in ITA No.6979/Del/2017 dated 09/05/2019 wherein it was held as under: "We are of the view that a company engaged in development of the software products cannot be com....
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...." 14. In view of the matter and following the decisions of the Hon'ble Delhi High Court as well as various Tribunals, Persistent Systems Limited cannot be treated as comparable company and the AO/TPO is directed to exclude Persistent Systems Limited from final list of comparable companies with regard to its software development service segment." 26. The Ld. Counsel for the assessee before us demonstrated from Page 563, 613, 622, 651 and 665 of the factual paper book referring to Director‟s report, financial statements of account, submitted that Persistent Systems Limited is not functionally comparable company with that of the assessee and therefore, the same cannot be treated as a comparable company. That further, there is no support segmental information of product or services available on record. 27. The Ld. DR could not place on record any evidences or material to demonstrate that the factual observation in respect of the Persistent Systems Limited as observed by the Pune Bench of the Tribunal (supra.) and the facts of the present case are different. The Ld. DR also could not refute the findings of the Pune Bench of the Tribunal (supra) vis-à-vis ....
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....ecognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under : "8. We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008-09, we direct exclusion of M/s. Thirdware Solutions Ltd." The comparable Thirdwar....
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.... per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordingly." Respectfully, following the plethora of decisions of various Tribunals as referred hereinabove, Thirdware Solutions Limited cannot be treated as comparable company and the AO/TPO is directed to exclude Thirdware Solutions Limited from final list of comparable companies with regard to its software development service segment." 30. Similarly also, in the case of M/s. FIS Solutions (India) Private Limited Vs. DCIT, ITA No.1695/PUN/2018 for the assessment year 2014-15 which is the same assessment year as of the assessee in this case. The Pune Bench of the Tribunal has held that Thirdware Solutions Limited has to be excluded from the final list of comparables with respect to the assessee company. The T....