TaxTMI 
TaxTMI 
2026 (9) TMI 711
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Tax Circle 12(3), The Deputy Commissioner Of Income Tax, Circle-11(2), Principal Commissioner Of Income Tax, The Deputy Commissioner Of Income Tax, Circle-2(1), Pr. Commissioner Of Income Tax-Vi, Additional Commissioner Of Income Tax, Range 12, Pr. Commissioner Of Income Tax-5, Pr. Commissioner Of Income Tax (Central), Dy. Commissioner Of Income Tax Circle-6(1)(2), Pr. Commissioner Of Income Tax-7, Deputy Commissioner Of Income Tax Circle-12(4), Pr. Commissioner Of Income Tax-7, Bangalore Versus M/S Sap India Pvt Ltd, M/S. Bearingpoint Property Services Private Limited, M/S. Msource (India) Pvt. Ltd., M/S. Subex Ltd RMZ Ecoworld, M/S. Nett App India Pvt. Ltd., M/S. Swiss Re Global Business Solutions India Private Limited, M/S. Tavant Technologies India Pvt Ltd For The Appellant : Sri. D.D. Nageshwar Rao, Advocate) For The Respondent : Sri. N. Venkataraman, ASG A/W Sri. E. I. Sanmathi, Senior Standing Counsel A/W. Sri. Sushal Tiwari & Sri. M. Dilip, Standing Counsel, Sri. K.K. Chythanya, Senior Advocate For Sri. S Sharath, Advocate, Sri. T. Suryanarayana, Senior Advocate For Smt. Tanmayee Rajkumar, Advocate, Sri. K. Mallahar Rao, Advocate C.A.V. JUDGMENT PER: HON'B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss operations of the company and is dependent on external factors like money supply, inflation, Govt. policy etc.,? b. "Whether under the facts and circumstances of the case, the tribunal is justified in law in equating business income / sales with operating revenues and thus concluding that foreign exchange gain forms part of operating revenues even when the same is not permissible under law"? c. "Whether on the facts and circumstances of the case the tribunal is justified in law in concluding that the assessee company is a risk mitigated entity without appreciating the facts of the case that the assessee company is also assuming risks like single customer risk and political country risks, which otherwise are not assumed by the comparable companies selected by the TPO / AO. d. "Whether on the facts and circumstances of the case tribunal is justified in law in rejecting Hinduja TMT Ltd., and Aftek Infosys Ltd., as a comparable stating that these companies earned super profits without mentioning the bench marked for profitability above which a company can be considered as earning super profits in the software services industry in which the taxpayer is oper....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on the decision of the Bangalore Tribunal in the case of 3DPLM Software solutions Ltd., and not deciding the selection of the comparables on the basis of specific facts brought on record by the TPO?" (3) "Whether the Hon'ble Tribunal is justified in directing the AO to recomputed the deduction under section 10A after reducing an amount of Rs.1,26,19,649/- incurred on telecommunication expenses, insurance and traveling expenses incurred in foreign currency from the total turnover also, without appreciating that there is no provision in section 10A that such expenses should be reduced from the total turnover, as clause (iv) of the Explanation to section 10A provides that such expenses are to be reduced only from the export turnover ?" (4) "Whether the Tribunal was justified, on the facts and in the circumstances of the case, in allowing relief to the assessee relying on the decision of the Hon'ble High Court, which has not reached its finality and a SLP has been filed against such order on this issue in the case of Tata Elxsi Ltd 349 ITR 98?"" ITA No.128/2015 "(1) "Whether, the Tribunal, on the facts and in the circumstances of the case was right....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing that the said companies are functionally different from the assessee - company even when the said comparables satisfy all the qualitative and quantitative filters applied by the TPO and the Tribunal has selectively applied the modified qualitative filter to only few comparables challenged by the assessee?" (3) "Whether on the facts and in the circumstances of the case, the Tribunal is right in allowing the market loss in respect of assessee's SEZ units by erroneously holding that the market loss is neither speculative nor contingent in nature when the said market loss is not allowable as per CBDT Instruction No.3/2010 dated: 20-03-2010 as actual losses are allowable as non- speculative only if the transactions qualify as eligible derivative transactions under clause (d) of proviso to section 43(5) of the Act?" (4) "Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee's claim for loss on account of forward contracts in Forex derivatives of Rs.5,88,66,157/- and setting it off against forex gain from the other component is allowable when the assessee is not falling under the category of 'engaged....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entre Pvt.Ltd and also in case of Vmoksha Technologies Pvt.Ltd and all the required tests were satisfied in case of the comparable's chosen by TPO"?" ITA Crob.1/2018 "a) Whether Hon'ble Tribunal order can be said to be perverse to the extent it does not adjudicate upon functional comparability and other objections raised with respect to the exclusion of Universal Print System Limited (segmental), Infosys BPO Limited, TCS E-Serve Limited and BNR Udyog Ltd from final list of comparables,? b) Whether Hon'ble Tribunal erred in not adjudicating upon exclusion of Excel Infoways Limited (segmental) from final list of comparables on the basis of functional dissimilarity, exceptional year of operations and failing filter applied by the Ld. TPO himself?" In ITA No.955/2017 and In ITA No.956/2017 "1)"Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the assessing authority or TPO The Tribunal also gives relief to assessee by directing assessing authority/transfer pricing officer to adopt RPT filter of 15%"?. (2) "Whether on the facts and in the circumstances of the case, the Tribunal is ri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....18 5. ITA 128/2015 16.07.2018 6. ITA 469/2015 19.07.2018 7. ITA 492/2016 01.10.2021 8. ITA 514/2016 28.06.2018 9. ITA 884/2017 c/w. ITA Crob.1/2018 26.06.2018 / 14.08.2018 10. ITA 955/2017 28.08.2018 11. ITA 956/2017 28.08.2018 3.4 The said judgments were carried in appeal by the assessee/Revenue before the Hon'ble Supreme Court. The Hon'ble Supreme Court, in the case of SAP Labs India (P) Ltd. v. Income Tax Officer (and other appeals), [2023] 454 ITR 121 (SC) / [2023] 149 taxmann.com 327 (SC), remitted the matters to the High Court for fresh consideration with a direction to decide and dispose of the appeals afresh in the light of the observations made therein. 3.5 The Hon'ble Supreme Court directed the High Court to examine, in each case, whether, while determining the Arm's Length Price, the provisions of the Act and the Rules governing transfer pricing had been duly followed and whether the findings recorded by the Tribunal in determining the ALP were perverse. For the sake of convenience, the relevant paragraphs of the judgment are extracted below: "... Therefore, the short ques....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction [or specified domestic transaction] in accordance with subsections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer." 20. Section 92C(1) thus visualizes determination of the "arms-length price" (ALP) by any of five enumerated methods, "being the most appropriate method", having regard to the "nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant facto....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s always open for the High Court to consider and examine whether the arm's length price has been determined while taking into consideration the relevant guidelines under the Act and the Rules. Even the High Court can also examine the question of comparability of two companies or selection of filters and examine whether the same is done judiciously and on the basis of the relevant material/evidence on record. The High Court can also examine whether the comparable transactions have been taken into consideration properly or not, i.e., to the extent non-comparable transactions are considered as comparable transactions or not. Therefore, the view taken by the Karnataka High Court in the case of Softbrands India (P.) Ltd. that in the transfer pricing matters, the determination of the arm's length price by the Tribunal is final and cannot be subject matter of scrutiny under section 260A of the IT Act cannot be accepted. 8. Thus, in each case, the High Court should examine whether the guidelines laid down in the Act and the Rules are followed while determining the arm's length price. Therefore, we are of the opinion that the absolute proposition of law laid down by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re perverse or not. The aforesaid exercise be completed, preferable within a period of nine months from the date of receipt of the present order by the respective High Courts. It is specifically observed that we have not entered into the merits of the cases at all and we have not expressed anything on the determination of the arm's length price in case of respective assessees, either in favour of the assessees or in favour of the Revenue. It is ultimately for the concerned High Court to take a fresh decision, as observed hereinabove." 3.6 In the consequence of the remand, these appeals are before us. The issues involved in all these appeals largely pertain to the determination of the Arm's Length Price by the Transfer Pricing Officer. B. THE RIVAL CONTENTIONS: 4. Sri N. Venkataraman, learned Additional Solicitor General of India (ASG), appearing for the Revenue, made the following submissions: 4.1 The concept of transfer pricing was introduced to curb tax avoidance arising from the increasing participation of multinational groups in economic activities, which gave rise to complex issues relating to transactions between two or more enterprises belonging to the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fully justified. 4.6 The amendment introduced by the Finance Act, 2012, by insertion of sub-section (2A) to Section 92C, is retrospective in nature and is applicable to all pending cases. 4.7 In the case of international transactions, foreign exchange gain or loss cannot be treated as a relevant factor for determining the ALP unless such gain or loss is inextricably linked to the international transaction itself. With reference to Rule 10B, the operating expenses or losses arising on account of foreign exchange fluctuation, as well as operating revenue arising on account of foreign currency fluctuation, are liable to be excluded from the operating cost or operating revenue, as the case may be. It is submitted that the character of foreign exchange gain or loss, whether operating or non-operating, depends upon its functional nexus with the business activity. 4.8 The working capital adjustment is permissible only for neutralizing the impact of differences in the working capital levels between the tested party and the comparable uncontrolled companies and only to the extent contemplated under Rule 10B(3). The burden lies upon the assessee to establish the necessity for such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... become unnecessary, as this Court is empowered to frame such substantial question of law in exercise of its jurisdiction under Section 260-A of the Act. 5. Sri K.K. Chythanya, learned Senior Counsel appearing for the assessee, made the following submissions: 5.1 The selection of comparables and the choice of filters are essentially fact-based exercises and do not give rise to a substantial question of law unless perversity is pleaded and established. In the absence of the Revenue specifically contending that the findings recorded by the Tribunal are perverse and demonstrating the same, the findings of the Tribunal continue to remain findings of fact. The questions raised by the Revenue do not even remotely plead perversity so as to constitute a substantial question of law. 5.2 As held by the Hon'ble Supreme Court in SAP Labs India (P) Ltd. (supra), the High Court is required to examine whether the provisions of the Act and the Rules governing transfer pricing have been followed and whether the findings recorded by the Tribunal are perverse. In the present appeals filed by the Revenue, the substantial questions of law do not even suggest any violation of the provisions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....determined by the assessee and undertake a fresh transfer pricing analysis. During such exercise, it is equally permissible for the assessee to seek exclusion of companies selected by the TPO. Where the transfer pricing study prepared by the assessee is under consideration, the burden is undoubtedly on the assessee to establish its correctness before the TPO or the Tribunal. However, once the transfer pricing study of the assessee is rejected and a fresh transfer pricing analysis is undertaken by the TPO, the burden shifts to the TPO to justify such analysis. The Revenue has incorrectly understood the Tribunal's findings as placing the entire burden upon the Revenue. Since the transfer pricing analysis undertaken by the TPO is itself under challenge before the Tribunal, the burden necessarily remains upon the Revenue to justify its correctness. 5.7 The exercise of determining comparability commences with a proper Functional, Assets and Risks (FAR) analysis. Once the threshold of a proper FAR analysis is crossed and a company is found either suitable or unsuitable as a comparable, the findings recorded in another case relating to the same comparable can legitimately be applie....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., a larger workforce, and comparatively lower vulnerability to market competition and fluctuations. The size of the comparable company should therefore remain within reasonable tolerance limits. The Tribunal rightly adopted an upper turnover filter of Rs.200 crores while considering companies having turnover between Rs.1 crore and Rs.200 crores. The said turnover filter is based on a rational and logical classification evolved by the expert Tribunal. In the absence of any statutory prohibition, such a view cannot be characterised as perverse so as to give rise to a substantial question of law. 6. Sri T. Suryanarayana, learned Senior Counsel, in addition to the submissions advanced by Sri K.K. Chythanya, learned Senior Counsel for the assessee, made the following submissions: 6.1 The computation of the ALP, the selection of uncontrolled comparables, the application of appropriate filters where exact comparables are not available, the determination of the ALP, and the computation of the arithmetic mean are all matters of estimation based on data. Consequently, the findings recorded by the Tribunal on such issues remain findings of fact unless a specific violation of any provisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmation and documentation forming the basis of the transfer pricing analysis undertaken by him. 8. We have heard the learned counsel for the respective parties and perused the material placed on record. C. THE LEGISLATIVE SCHEME 9. Before proceeding to examine the questions arising in the individual appeals, this Court finds it necessary to examine the scope and ambit of the provisions contained in Chapter X of the Income-tax Act, 1961, namely, Sections 92, 92A to 92CA, 92D, 92E, and 92F of the Act, together with Rules 10A to 10E of the Income-tax Rules, 1962. For the sake of convenience, the relevant provisions are extracted below: "[Computation of income from international transaction having regard to arm's length price. 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction [or specified domestic transac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etermination of arm's length price, in the manner as may be prescribed : [Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction [or specified domestic transaction] has actually been undertaken [does not exceed [such percentage of the latter, as may be notified] by the Central Government in the Official Gazette in this behalf], the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's length price.] [Explanation.-For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009.] [(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of an i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined : Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section : Provided further that where the total income of an associated enterprise is computed under this subsection on determination of the arm's length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise. [Reference to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an international transaction [or specified domestic transaction] in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the prev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ified domestic transaction] in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. [(3A) Where a reference was made under subsection (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or re-computation or fresh assessment, as the case may be, expires.] [(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer.] (5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.." Rule 10B: "Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the ope....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions [or specified domestic transactions] involving transfer of unique intangibles or in multiple international transactions [or specified domestic transactions] which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction [or the specified domestic transaction] in which they are engaged, is determined; (ii) the relative contribution made by each of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; [(f) any other method as provided in rule 10AB.] (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on or after the 1st day of April, 2014, is the method specified in clause (b), clause (c) or clause (e) of sub-section (1) of section 92C, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be,- (i) the data relating to the current year ; or (ii) the data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year: Provided that where the data relating to the current year is subsequently available at the time of determination of arm's length price of an international transaction or a specified domestic transaction during the course of any assessment proceeding for the assessment year relevant to the current year, then, such data shall be used for such determination irrespective of the fact that the data was not available at the time of furnishing the return of income of the relevant assessment year." 9.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons stipulated in clauses (a) to (d) of sub-section (3) of Section 92C. 9.5 The aforesaid statutory mandate has been explained by the High Court of Delhi in American Express Banking Corporation (India Branch) vs. Assistant Director of Income-tax, International Taxation, [2025] 174 taxmann.com 595 (Delhi)/[2025] 476 ITR 752 (Delhi), wherein it has been held that unless the conditions specified under Section 92C(3) are satisfied, the TPO cannot proceed to make any adjustment. The same principle was reiterated by the High Court of Delhi in Li and Fung India (P.) Ltd. vs. Commissioner of Income-tax, [2014] 223 Taxman 368 (Delhi)/[2014] 361 ITR 85 (Delhi), wherein Section 92C was analysed in the following terms: "26. Chapter X opens with Section 92 which provides that the income arising from "international transactions" shall be calculated having regard to the ALP. The explanation to Section 92 clarifies that allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. Section 92A defines as to which the enterprises would, for the purposes of the provisions of Chapter X, come within the purview of an AE. S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee, failed to furnish, within the specified time the information sought pursuant to a notice issued under Section 92D (3). The first proviso to Section 92 (3) mandates that before the AO proceeds to determine the ALP on the basis of the material or information or document available with him he shall give an opportunity by serving upon the assessee a show-cause notice fixing thereby a date and time for the said purpose. Under Section 92C (4) the Assessing Officer is empowered to compute the total income of the assessee only after the ALP has been determined by the Assessing Officer in terms of the provision of subsection (3) of Section 92C. 28. Under Section 92CA (inserted w.e.f 1.6.2002), the AO is empowered to refer the computation of ALP, in relation to, an "international transaction" under Section 92C to the TPO, if he considers it "necessary" or "expedient" to do so with the prior approval of the Commissioner. It is only after a reference is made under Section 92CA(1) that the TPO gets a mandate to approach upon the assessee by issuing him a notice calling upon him to produce or cause to be produced on a date to be specified therein, any evidence on which the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal transaction shall keep and maintain such information and documents as may be prescribed in relation to such transactions. The said provision further imposes an obligation upon every such person to furnish the prescribed information and documents to the Assessing Officer whenever required. 9.9 Section 92D imposes a mandate upon the taxpayer to maintain such information and documents as may be prescribed. 9.10 Section 92E requires every person entering into an international transaction to obtain a report from an accountant and furnish the same, in the prescribed form and manner, on or before the specified date, duly signed and verified, setting forth the prescribed particulars. Correspondingly, Rule 10E prescribes Form No. 3CEB for the said purpose. Section 92F defines certain expressions used in Chapter X. 9.11 Rule 10A defines certain expressions used in the Rules. 9.12 Rule 10B prescribes the complete mechanism for determination of the Arm's Length Price under Section 92C. Sub-rule (1) prescribes the appropriate methods for determination of the Arm's Length Price. 9.13 Sub-rule (2) sets out the factors relevant for comparability analysis. It mandates tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....data, the degree of comparability, the extent to which reliable and accurate adjustments can be made to eliminate material differences, and the nature, extent and reliability of the assumptions required to be made in applying the selected method. 9.18 Rule 10CA lays down the mechanism for computing the Arm's Length Price where application of the most appropriate method results in more than one comparable price and also contains illustrations for its application. 9.19 Rule 10CB provides for computation of interest income pursuant to secondary adjustments for the purposes of Section 92CE. Rule 10D, in conformity with Section 92D, prescribes the information and documentation to be maintained by every person in relation to an international transaction and comprehensively sets out the documentation requirements applicable to every taxpayer. 9.20 Likewise, Rule 10DA, in conformity with Section 92D, requires the maintenance and furnishing of information and documents by certain persons constituting an international group and exhaustively prescribes the information required to be maintained. Rule 10E, in conformity with Section 92E, prescribes Form No. 3CEB and the particulars....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he TPO do not satisfy the requirements or fall within the parameters of clauses (a) to (d) of sub-section (3) of Section 92C. 11.4 Further, the comparables selected by the TPO are also required to satisfy the requirements of Rule 10B(2) of the Rules. We find that the set of comparables adopted by the TPO has been selected from a standard list of comparables applied across different assessees and does not reflect the exercise contemplated under Rule 10B(2). The said anomaly has been corrected by the Tribunal in exercise of its jurisdiction as the final fact-finding authority. 11.5 Moreover, the process of inclusion or exclusion of comparables is essentially a data-driven factual exercise. Such findings ordinarily remain findings of fact unless the exercise is shown to be perverse. Perversity, when properly pleaded and established, may give rise to a substantial question of law. However, in the present batch of appeals, we find that neither has perversity been specifically pleaded nor has the same been demonstrated insofar as the inclusion or exclusion of comparables is concerned. II. Turnover Filter: 12. The comparables included or selected by the TPO are companies havin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ject of the filter is to ensure that uncontrolled transactions are selected as comparables and that companies having significant controlled transactions are excluded, except where the availability of comparable companies is limited. 13.1 In the present batch of appeals, the TPO has applied an RPT Filter of 25%, whereas the taxpayer as well as the Tribunal have adopted an RPT Filter of 15%. 13.2 Undoubtedly, uncontrolled comparable transactions are to be preferred in order to eliminate the influence of related party transactions on profitability. At the same time, insisting upon comparables having absolutely no related party transactions may not always be practicable. The RPT Filter, therefore, operates as a permissible tolerance while selecting comparable companies. Ideally, the percentage of the RPT Filter should be the lowest possible among the available comparable companies. 13.3 Where the taxpayer has selected comparable companies by applying a 15% RPT Filter and there is no finding that such comparables fail to satisfy the requirements of the Act or the Rules, there is no rational basis for increasing the RPT threshold to 25%. Where comparable companies with a lower p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of proceeds from the AE is liable to be excluded from the operating revenue or operating cost. 14.1 The learned ASG, however, submitted that where the foreign exchange gain or loss has a direct nexus with the international transaction, such gain or loss may appropriately be treated as part of the operating revenue or operating cost. 14.2 On the other hand, it is the contention of the taxpayer that where the foreign exchange gain or loss is linked to, or is derived from, the business operations, it should be classified as operating or non-operating depending upon its direct nexus with the operating activity. It is submitted that gain or loss arising on account of fluctuation in foreign exchange during the execution of export or import contracts is merely incidental to the business operations and, therefore, is required to be treated as an operating item. 14.3 There can be no dispute that the international transactions entered into by the taxpayer with its Associated Enterprises constitute the basis for determination of the ALP and that foreign exchange fluctuation is an external factor. However, where the international transaction with the Associated Enterprise is intrinsic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermination, the burden, to that extent, shifts upon the TPO to justify the comparables selected or rejected by him. 15.2 There cannot be a universal rule regarding the burden of proof either upon the taxpayer or upon the TPO. The burden necessarily depends upon the party seeking inclusion or exclusion of a comparable. Where inclusion of a comparable by the TPO is challenged before the Tribunal, the burden undoubtedly remains upon the TPO to justify such inclusion. Conversely, where exclusion of a comparable is sought by the taxpayer before the Tribunal, or where the taxpayer seeks inclusion of a new comparable, the burden of maintaining and producing the information and documentation contemplated under Section 92D and Rule 10D continues to remain upon the taxpayer. Thus, the question of burden of proof is essentially fact-dependent and varies according to the nature of the challenge raised in each case. VI. Inclusion or Exclusion of Comparables at the Appellate Stage: 16. The Revenue has vehemently contended that once the ALP is determined by the TPO, either on the basis of the transfer pricing study submitted by the taxpayer or on the basis of an independent analysis unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial is available on record, or to remand the matter to the TPO or the Assessing Officer for fresh determination of the ALP after considering the proposed inclusion or exclusion of comparables. 16.5 In this regard, the proviso to sub-rule (5) of Rule 10B expressly permits the use of subsequently available current year data at the stage of determination of the ALP, notwithstanding that such data was not available at the time of furnishing the return of income for the relevant assessment year. Having regard to the object underlying the said proviso, this Court finds no statutory prohibition against permitting inclusion or exclusion of comparables at the appellate stage before the Tribunal on the basis of subsequently available data. 16.6 It is, however, made clear that the use of subsequently available data and the consequent inclusion or exclusion of comparables must strictly satisfy the requirements of the Act and the Rules governing the selection of comparables. VII. Plus or Minus 5% Variation: 17. The Revenue contends that where the arithmetic mean is determined in terms of the first proviso to Section 92C(2), and the variation between the ALP so determined and the pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as to whether sub-section (2A) operates retrospectively has been authoritatively answered by the High Court of Delhi in Marubeni India (P.) Ltd. vs. Director of Income-tax, [2013] 33 taxmann.com 100 (Delhi)/ [2013] 354 ITR 638 (Delhi), wherein it has been held that sub-section (2A) operates retrospectively from Assessment Year 2002-03. Consequently, the issue regarding the retrospective operation of sub-section (2A) is no longer res integra. 17.5 Insofar as the contention that the 5% variation should be treated as a standard deduction is concerned, Section 92C(2) merely provides a tolerance range within which no transfer pricing adjustment is required where the variation between the arithmetic mean and the price of the international transaction falls within the prescribed limit. On a plain and literal interpretation, the provision does not contemplate the grant of a standard deduction of 5% before determining whether the variation falls within the permissible range. 17.6 The object of prescribing a tolerance range of 5%, which now stands reduced to 3% by the Finance Act, 2012, was not to confer a deduction but to avoid transfer pricing adjustments on account of marginal pric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eed the specified percentage. Sub-section (2A), therefore, stipulates that where the difference exceeds the prescribed percentage, the assessee would not be entitled to exercise the option under the first proviso to sub-section (2) to Section 92C and claim reduction. Similarly, the first proviso to Section 92C stipulates that where more than one price is determined by most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices." 17.9 The aforesaid observations also support our view that the tolerance range of 5% is not in the nature of a standard deduction. VIII. Working Capital Adjustment: 18. Working Capital Adjustment (WCA) is one of the comparability adjustments undertaken while determining the ALP to neutralize differences in financing costs arising from variations in the levels of receivables, payables, and inventory between the tested party and comparable uncontrolled enterprises. Though Working Capital Adjustment is not a filter for the selection of comparables, Rule 10B(3) contemplates making reasonably accurate adjustments to eliminate material differences affecting the price or profit margin. 18.1 The necessit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as permissible under Rule 10B, provided the relevant facts and circumstances remain identical. If the functional analysis and other relevant factors continue to be the same, and the issue has already been adjudicated by the Tribunal, no fault can be found with the Tribunal following its earlier decision instead of undertaking a repetitive exercise. Merely because the Tribunal has relied upon its earlier decision, it cannot be said that its findings are not in conformity with Section 92C of the Act and Rule 10B of the Rules. 19.2 However, it is always open to the Revenue or the assessee to demonstrate that the inclusion or exclusion of a particular comparable in the earlier decision was incorrect or that the facts of the present case are distinguishable so as to warrant a different conclusion. E. CONCLUSION (i) The Court concludes that Chapter X of the Income-tax Act, 1961 constitutes a self-contained code governing transfer pricing, providing a complete statutory framework for determination of the Arm's Length Price (ALP), maintenance of documentation, and assessment of international transactions. (ii) The initial burden of determining the ALP and maint....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shown to be contrary to the Act or vitiated by perversity. F. APPLICATION OF THE AFORESAID LEGAL PRINCIPLES TO THE FACTS 20. Though other issues may arise in the appeals below, in the remand proceedings, we are concerned only with the issues to the extent directed by the Hon'ble Supreme Court in SAP Labs India (P.) Ltd., (supra). (1) ITA No.956/2017: SQL No.1: 21. The issue relates to the direction issued by the Tribunal to adopt a Related Party Transactions (RPT) filter of 15%. The Tribunal has recorded a finding that the normal tolerance limit for the RPT filter should not exceed 15%. 21.1 This Court has already discussed the issue in detail and has held that an RPT filter of up to 25% may be adopted only where sufficient comparable companies satisfying the qualitative and quantitative parameters are not available, and only upon recording a specific finding to that effect. In the absence of such a finding, the normal benchmark of 15% is required to be applied. 21.2 In the present case, it is not the contention of the Revenue that sufficient comparable companies satisfying the 15% RPT filter were unavailable. The issue of the RPT filter largely falls....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot shown that the factual matrix in the present case is materially different so as to warrant a different conclusion. 22.2 In the above circumstances, we are of the view that no substantial question of law arises from the order of the Tribunal on this issue. SQL Nos.3 and 4: 22.3 In the discussion made hereinabove, we have held that foreign exchange gain or loss cannot be treated as operating in nature unless it is derived from the international transaction, with the underlying contracts having a direct nexus to such international transaction. 22.4 Though the Revenue has contended that foreign exchange gain or loss is merely attributable to the operating activity and is not derived from the operating activity, and therefore cannot be treated as an operating item, in the light of the discussion made above, it is open to the Transfer Pricing Officer to verify, on the facts of each case, whether the foreign exchange gain or loss is derived from the international transaction. Such determination shall necessarily depend upon the existence of a direct nexus between the foreign exchange gain or loss and the international transaction. To undertake the above exercise, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gain or loss. The said issue has already been answered by this Court in ITA No. 128/2015. The findings recorded while answering Substantial Question of Law Nos. 3 and 4 in ITA No. 128/2015 shall equally govern the present case, subject to the observations, findings, and the liberty reserved to the Transfer Pricing Officer therein. To undertake the above exercise, the issue stands remitted to the TPO. 26.1 Accordingly, we hold that no substantial question of law arises for consideration on this issue. SQL Nos.(d) and (e): 26.2 The above Substantial Questions of Law relate to the exclusion of certain comparables on the ground of supernormal profits. The principal dispute concerns the correctness of the exclusion of such comparables. As directed by the Hon'ble Supreme Court in SAP Labs India (P.) Ltd. (supra), this Court is required to examine whether the selection or exclusion of comparables is in conformity with the provisions of Section 92C of the Act and Rule 10B of the Rules. 26.3 While directing the exclusion of certain comparables, the Tribunal has placed reliance on its earlier decisions. Insofar as the exclusion of Hinduja TMT Limited and Aftek Infosys L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom 1-4-2002, is applicable retrospectively from Assessment Year 2002-03 onwards. Since the assessment year involved in the present case is 2003-04, the said amendment squarely applies. 26.11 Accordingly, the findings recorded by the Tribunal on this issue are set aside, and the matter is remitted to the TPO for fresh determination in the light of the observations made hereinabove. 26.12 All the three Substantial Questions of Law are, accordingly, answered in favour of the Revenue and against the assessee. (7) ITA No.492/2016: 27. During the course of hearing, it was submitted that only substantial question of law Nos. 1 and 2 arise for consideration in the present appeal. SQL No.1: 27.1 The issue relating to the treatment of foreign exchange gain or loss has already been considered by this Court while answering Substantial Question of Law Nos. 3 and 4 in ITA No. 128/2015. Subject to the findings recorded therein, and the directions issued and liberty reserved to the Transfer Pricing Officer, we hold that no substantial question of law arises for consideration by this Court on this issue. To undertake the above exercise, the issue stands remitted to the TPO.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any derived substantial revenue from translation services and outsourced a significant portion of its translation work. Having regard to the nature of its activities, the Tribunal concluded that the company was functionally dissimilar and, therefore, not comparable. 28.3 Insofar as Eclerx Services Limited is concerned, the Tribunal again followed its earlier decision in e4e Business Solutions India Private Limited (supra) and held that the company was functionally different, being engaged in providing high-end knowledge process outsourcing services involving specialised domain knowledge and automation expertise. 28.4 While directing the exclusion of Tata Elxsi Limited, the Tribunal, upon examining its annual report, recorded a finding that the company was engaged in diversified activities, including embedded systems, product design, industrial design services, engineering services, visual computing laboratories, and system integration and support services. Under these broad segments, the company was found to be carrying on multiple diversified product design, engineering design, and visual computing activities. On that basis, the Tribunal concluded that the company was functi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....emonstrated perversity in the findings of the Tribunal. In the absence of any demonstrated perversity, the findings of the Tribunal remain findings of fact, giving rise to no substantial question of law. 29.1 Accordingly, we hold that no substantial question of law arises for consideration by this Court. (10) ITA Crob.No.1/2018 in ITA No.884/2017: 30. The assessee has preferred the cross-objection questioning the exclusion of certain comparables by the Tribunal. 30.1 The Co-ordinate Bench of this Court, in the case of Smt. Jyothi Kumari v. Assistant Commissioner of Income-tax (Inv.) Circle-2, [2012] 20 taxmann.com 236 (Kar.), has held that a cross-objection is not maintainable in an appeal under Section 260A of the Act. In view of the above judgment, the cross-objection is hereby dismissed. (11) ITA No.10/2011: SQL No.20.6: 31. We have held that, by virtue of sub-section (2A) of Section 92C, inserted by the Finance Act, 2012 with retrospective effect from 01.04.2002, the proviso to Section 92C, as it existed prior to its amendment by the Finance (No. 2) Act, 2009, is inapplicable. We have further held that the 2012 amendment operates retrospectively from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erence. The determination of the ALP requires comparison with companies that are comparable in terms of functions performed, assets employed, risks assumed, and the nature of the contractual arrangement. 31.7 In that view, we hold that the Tribunal has not acted in violation of any provision of the Act or the Rules. The findings recorded by the Tribunal are based on the facts of the case and the settled principles governing transfer pricing. Accordingly, no substantial question of law arises for consideration by this Court. SQL No.20.9: 31.8 This question relates to the acceptance of Satyam Computers Limited as a comparable, despite the contention that its audited financial statements were unreliable on account of alleged falsification. 31.9 The Tribunal considered ten comparable companies with profit margins ranging from 6.09% to 40.96%. The profit margin of Satyam Computers Limited was 30.86%. ADCC Research and Computing Center Limited had a profit margin of 40.96%, while Xcel Vision Technologies Limited had a profit margin of 35.88%. 31.10 Though it is contended that the financial statements of Satyam Computers Limited were unreliable due to falsification, n....