TaxTMI 
TaxTMI 
2021 (3) TMI 803
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....ent 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 gain/loss arising on account of foreign exchange fluctuation as non-operating in nature while computing ....
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....ing 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 the case are that the assessee is engaged in the business of software development services. During the year under consideration, the assessee has undertaken international transactions with its AEs as under: Sr.No. Nature of transactions Amount Method 1. Provision of software ....
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.... 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-economic conditions in India and the other countries, RBI policies and its intervention in the foreign currency market, conditions prevailing in the world currency markets etc. Hence, the gain or loss due to foreign exchange rate fluctuations cannot be considered to be part of operating revenues or expenses in this situation. In the second situation mentioned abov....
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....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 illustrated by way of the following situations: (i) In a case where two enterprises sell the same product on the same date at the same net margin but realize the sale proceeds on different dates, their PLI computed by including the FE gain/loss in the operating revenue would be different due to the difference in the quantum of the gains/loss arising from the difference in the exchan....
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.... 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 matter reaches a finality in the light of the Change in law doing away with the right of the department to appeal against the order of the DRP, we rely on the above cited decisions of the Hon‟ble ITAT Mumbai, apart from the detailed reasons cited in the preceding paragraphs, to hold that the foreign exchange fluctuation gain/loss should be treated as non-operating income/expense for the purpose of computation of....
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....rence 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 Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). 23. 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 that such rules are not applicable to the assessment year under consideration. The Hon‟bl....
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....ded 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 treatment of operating cost. On pertinent query, it was stated by the Ld. AR that the foreign exchange loss relates to its transactions from operations by which the Revenue has been earned and offered for taxation. 16.2 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 excha....
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.... 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 transaction pertaining to provision of software development services. In this regard, the Ld. Counsel for the assessee submitted that they want inclusion of three companies in the final set of comparables which are (A) Cat Technologies Limited (B) Evoke Technologies Private Limited and (C) Maveric Systems Limited. (A) Cat Technologies Limited : 11. The Ld. Counsel for the assessee submitted that the TPO has rejected this company due to persistent loss making company. Further, it is contente....
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....e 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 Cat Technologies Limited will not be considered as persistent operating loss making company. Taking the totality of facts and circumstances, we direct the TPO/AO to include this company i.e. Cat Technologies Limited in the final set of comparables with that of the assessee. (B) Evoke Technologies Pvt. Ltd. 17. The next company which the assessee wants to include in the final set of comparables is Evoke Technologies Pvt. Ltd. The Ld. Counsel for the assessee submitted that the revenue from exports is ....
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.... 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 justified in excluding this company in the final list of comparables. Thus, the impugned order is upheld on this score. (C) Maveric Systems Ltd : 20. The next company which the assessee wants to include in the final set of comparables is Maveric Systems Ltd. The Ld. Counsel for the assessee submitted that during the FY 2013-14, Maveric had obtained permission for relocation of its SEZ unit. The relocation of business cannot be considered as peculiar circumstances as it is normal for an organization and does not change bus....
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....ar 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 assessment year under consideration is 2014-15 with the corresponding F.Y. 2013-14. Since the unit got physically moved during June 2014 i.e. in the succeeding financial year, the factor of relocation of its SEZ unit cannot be considered as extraordinary event for the year. However, it is also an admitted position that this company received compensation of Rs. 4,96,31,866/- on account of such relocation which was shown as income during the year in the P & L account under "Exceptional item", but was not considered as operating revenue. Since this....
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....istent 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 without there being support segmental information. During the year the company made acquisitions. We observe that the Hon‟ble Delhi High Court in the case of Pr. CIT Vs. Saxo India Pvt. Ltd. ITA No.682/2016 has held as follows: "10. On a comparison with the data available and made available undoubtedly, the object of the statute is to "pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of ....
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....ut 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 involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue Of exclusion of these companies shou....
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.... 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 remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the T PO should be regarded as the conclusions of the DRP. We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP." 13. The Co-ordinate Bench of the Tribunal, Cochin in the case of US Technology International Private Limited Vs. ACIT in ITA No.592/Coch/20....
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....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 software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee‟s objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice u/s. 133(6) of the Act, software development constitutes 90% of its revenue. In this view of the matter, the Assessing Officer included this company, i.e., Persistent Systems Ltd. in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected....
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....ration. 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 compared with the assessee who is engaged in contract software development services. Accordingly, we direct the Ld.A.O./TPO to exclude the company from the final set of the comparables. 10.3 Further, the Ld. AR relied on the on the order of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows: "13.2 We have considered the rival submissions as well as the relevant material on record. As pointed out by the learned AR of the assessee that the functional comparability of the company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para 17.3 as under: "....
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....ntal 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 the facts of the present case. We observe from the materials available on record that this company is functionally not comparable with that of the assessee company and more so because, segment wise information regarding product or services are not available in respect of this company. Therefore, we direct the AO/TPO to exclude Persistent Systems Limited from the final list of comparable companies with regard to its software development service segment. (E) Thirdware Solutions Limited : 28. The assessee submitted that Thirdware Solutions Ltd. has derived its entire revenue from sale of products and this company has made purchases of stock and holds inventory which highlights that the company is engaged in purchase and sale of products and therefore, it is not f....
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....dware 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 Thirdware Solutions Ltd. has to be excluded as it is predominant in activity and segmental details are not available. Accordingly we direct the TPO/A.O to exclude this comparable from the list of comparables for determining the ALP." 17. We further find the same view has been taken by the Co-ordinate Bench of the Tribunal, Pune in the case of M/s. John Deere India Pvt. Ltd. Cybercity Vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales‟ of Rs. ....
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....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 Tribunal had decided this issue after considering its own decision in Symantec Software India Private Limited Vs. DCIT (supra.). The relevant Para is extracted herein below: "11. We observe again that our aforesaid finding pertains to the assessment year 2014-15 which is relevant assessment year under consideration before us at this present moment. It is therefore, natural that all parameters regarding this company would be same and respectfully, following our findings in Symantec Software India Private Limited. Vs. DCIT (supra.), we direct the TPO/AO to exclude this company i.e. Thirdware Solutions Limited from the final list of comparables." The Ld. DR submitted that there is no change in facts and circumstances in respect to the assessee and also in respect to the comparable company i.e. Thirdware Solutions Limited in the pre....