Appeal details
Counselvise Citation
[2017] 127 COUNSELVISE.COM (IT) 4856 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 4 month(s) 30 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-08-2017
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I1
Next Hearing Date
20-06-2017
Assessment Year
2009-2010
Appeal Filed On
31-03-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1879/DEL./2014 (ASSESSMENT YEAR : 2009-10) MCKINSEY KNOWLEDGE CENTRE INDIA VS. DCIT, CIRCLE 6 (1), PRIVATE LIMITED, NEW DELHI. 1 ST - 7 TH FLOOR, BLOCK III, VATIKA BUSINESS PARK, SECTOR 49, BADSHAHPUR, SOHNA ROAD, GURGAON 122 018. (PAN : AACCM2356G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PORUS KAKA, ADVOCATE AND SHRI DINESH CHAWLA, ADVOCATE REVENUE BY : SHRI KUMAR PRANAV, SENIOR DR DATE OF HEARING : 09.08.2017 DATE OF ORDER : 30.08.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. MCKINSEY KNOWLEDGE CENTRE INDI A PRIVATE LTD. (HEREINAFTER REFERRED TO AS THE ASSES SEE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORD ER DATED 28.02.2004, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) REA D WITH SECTION ITA NO.1879/DEL/2014 2 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE AC T) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER ALIA T HAT :- GROUNDS ON TRANSFER PRICING ISSUES THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW: 1. THE LEARNED TPO / AO / DRP HAVE ERRED IN MAKING AN ADDITION OF INR 72,51,703 TO THE TOTAL INCOME OF THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF IT SUPPORT SERVICES RENDERED BY THE APPELLANT TO ITS ASSOCIATE D ENTERPRISE CAE'). 2. THE LEARNED TPO / AO / DRP HAVE ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH PROVISIONS OF THE INCOME-TAX ACT, 1961 ('THE ACT') AND MODIFYING THE ECONOMIC ANALYSIS FOR DETERMINATION OF ARM'S LENGTH PRICE (ALP'), OF THE INTER-COMPANY TRANSACTIONS. 3. THE LEARNED TPO I AO I DRP HAVE ERRED IN: A. NOT ACCEPTING THE USE OF MULTIPLE YEAR DATA, AS ADOPTED BY THE APPELLANT IN ITS TRANSFER PRICING ('TP') DOCUMENTATION; AND B. DETERMINING THE ARM'S LENGTH MARGINS I PRICES USING DATA PERTAINING - FINANCIAL YEAR CFY') 2008- 09 WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE INDIAN TP DOCUMENTATION REQUIREMENTS. 4. THE LEARNED TPO / AO / DRP HAVE ERRED IN REJECTING CERTAIN COMPANIES SELECTED BY THE APPELLA NT BY APPLYING INAPPROPRIATE COMPARABILITY CRITERIA SUCH AS: A. TURNOVER FILTER B. DIFFERENT ACCOUNTING YEAR ITA NO.1879/DEL/2014 3 5. THE LEARNED TPO / AO / DRP HAVE ERRED IN SELECTING CERTAIN COMPANIES (WHICH ARE EARNING SUPER NORMAL PROFITS) AS COMPARABLE TO THE APPELLANT. 6. THE LEARNED TPO / AO / DRP HAVE ERRED IN ERRONEOUSLY REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT AND ADDING CERTAIN COMPANIES TO THE FINAL SET OF COMPARABLE COMPANIES ON AN AD-HOC BASIS, THEREBY RESORTING TO CHERRY PICKING OF COM PARABLES FROM THE ACCEPT AND REJECT MATRIX OF THE APPELLANT TO DETERMINE ALP. 6.1. THE LEARNED AO/TPO/DRP HAS ERRED, IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, IN INCLUDING CERTAIN COMPANIES LISTED BELOW TO THE FIN AL SET OF COM PARABLES, EVEN THOUGH THESE COMPANIES ARE NON-COMPARABLE TO THE ASSESSEE ON VARIOUS GROUNDS, TO BENCHMARK THE IMPUGNED TRANSACTION OF THE ASSESSEE: CORAL HUB LIMITED; COSMIC GLOBAL LIMITED; AND ECLERX SERVICES LIMITED 6.2. THE LEARNED AO ITPO ! DRP HAS ERRED, IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, BY WRONGLY EXCLUDING CERTAIN COMPANIES AS BELOW FROM THE FINAL SET OF COMPARABLES TO BENCHMARK THE IMPUGNED TRANSACTION OF THE ASSESSEE ON AN AD-HOC BASIS: CG-VAK SOFTWARE & EXPORTS LIMITED R SYSTEMS INTERNATIONAL LIMITED CEPHA IMAGING LIMITED; AND FORTUNE INFOTECH LIMITED 7. THE LEARNED TPO/ AO/ DRP HAVE ERRED IN PASSING AN ORDER WHICH HAS COMPUTATIONAL ERRORS IN THE MARGIN OF COMPARABLE COMPANIES USED IN DETERMINATION OF THE ARM'S LENGTH MARGIN. ADITYA BIRLA MINACS WORLDWIDE LIMITED; COSMIC GLOBAL LIMITED; ITA NO.1879/DEL/2014 4 ECLERX SERVICES LIMITED; JEEVAN SOFTECH LIMITED; MICROGENETICS SYSTEMS LIMITED; AND MICROLAND LIMITED 8. THE LEARNED TPO / AO / DRP HAVE ERRED IN NOT CONSIDERING, INTER-ALIA, GAINS/ LOSSES ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS WHILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES AS WELL AS THE APPELLANT FROM PROVISION OF IT SUPPO RT SERVICES. 9. THE LEARNED TPO / AO / DRP HAVE ERRED IN NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S-A- VIS THE COMPARABLE COMPANIES. 10. THE LEARNED TPO / AO / DRP HAVE FAILED TO FOLLOW THE DECISION OF THE HON'BLE ITAT FOR AY 2006-07 IN APPELLANTS OWN CASE WHICH HAS BEEN AFFIRMED BY THE HON'BLE HIGH COURT GROUNDS ON CORPORATE TAXATION 11. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED IN LAW AND IN FACT, DENYING THE CLAIM OF THE APPELLANT IN RESPECT OF PROFITS DERIVED FROM EXPORT OF CUSTOMISATION OF DAT A I DATA PROCESSING I BACK OFFICE OPERATIONS, ACTING AS A SUPPORT CENTRE AS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 ('THE ACT') READ WITH THE NOTIFICATION NO SO 890(E) DATED SEPTEMBER 26, 2000 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES ('CBDT'). 10.1 THE LEARNED AO ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE: A) THAT THE APPELLANT IS AN IT-ENABLED COMPANY SET UP IN ACCORDANCE WITH THE SOFTWARE TECHNOLOGY PARKS SCHEME OF THE GOVERNMENT OF INDIA AND IS ENGAGED IN RENDERING IT ENABLED SERVICES BEING ITA NO.1879/DEL/2014 5 CUSTOMISATION OF DATA / DATA PROCESSING/ BACK OFFIC E OPERATIONS/ ACTING AS A SUPPORT CENTRE. B) THAT SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI') CONFIRMED THAT THE APPELLANT IS ENGAGED IN PROVISION OF IT-ENABLED SERVICES IN THE NATURE OF BACK OFFICE OPERATIONS, DATA PROCESSING, BACK OFFIC E OPERATIONS DATA/CUSTOMIZATION OF DATA AND THE SAID ACTIVITIES ARE COVERED AS EXPORT OF COMPUTER SOFTWA RE UNDER THE STP SCHEME. C) THAT THE APPELLANT ACTS AS A SUPPORT CENTRE TO MCKINSEY & CO., US AND IS THEREFORE, ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT. 10.2 THE LEARNED AO ERRED IN RELYING ON THE DOCUMENTATION / PUBLICATION WHICH WERE NEVER FURNISHED TO THE APPELLANT AND WITHOUT PREJUDICE AR E NOT RELEVANT TO THE ISSUE AND PRAY THAT THE DEDUCTI ON CLAIMED BE ALLOWED. 10.3 THE LEARNED AO HAS ALSO ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE: A) THAT THE ACTIVITIES OF THE APPELLANT WERE ALSO EXAMINED AND UPHELD BY THE COMMISSIONER OF INCOME TAX (APPEALS) AND THEREAFTER BY THE HON'BLE INCOME TAX APPELLATE TRIBUNAL, FOR THE ASSESSMENT YEARS 2002-03 AND 2006-07 WHICH HAD DETERMINED THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF IT ENABLED SERVICES . B) THAT THE ACTIVITIES OF THE APPELLANT WERE ALSO EXAMINED AND UPHELD BY THE OFFICE OF THE LEARNED AO FOR THE ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06 AND THEREBY, A MERE CHANGE IN OPINION. C) THAT THE LEARNED TRANSFER PRICING OFFICER, AN OFFICER OF THE INDIAN REVENUE, HAS ALSO IN HIS ORDE R DATED 23 JANUARY, 2013 ISSUED AFTER EXAMINATION OF THE COMPANY'S TRANSFER PRICING DOCUMENTATION AND FUNCTIONAL AND ECONOMIC ANALYSIS CONTAINED THEREIN ITA NO.1879/DEL/2014 6 HAS COMPLETED THE TRANSFER PRICING ASSESSMENT OF MCKINSEY AS A COMPANY ENGAGED IN RENDERING ITIIT ENABLED SERVICES. 12. THE FINDING OF THE LEARNED AO THAT THE APPELLANT CASE IS NOT EXPORTING OR TRANSMITTING OF CUSTOMISED ELECTRONIC DATA IS ERRONEOUS, PERVERSE AND CONTRARY TO THE RECORD AND OUGHT TO BE SET ASID E. 13. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED IN LAW AND IN FACT, IN HOLDING THAT THE REPORT OF THE AUDITOR IS NON EST S INCE THE SAME IS NOT BASED ON FACTS AND CORRECT ACCOUNTS . 14. THE LEARNED AO HAS ERRED: A) IN STATING THAT BY ELIMINATING HALF-CIRCUIT CHARGED, THE APPELLANT HAS EVADED 15 PERCENT OF THOSE CHARGED FROM BEING TAXED IN INDIA WITHOUT APPRECIATING THE FACT THAT THERE IS NO REQUIREMENT IN LAW THAT THE TRANSMISSION OR EXPORT OF DATA IS EFFECTED BY THE STP UNDERTAKING OR THE EXPENSES FOR THE SAME SHOULD BE BORNE BY THE STP UNDERTAKING. B) NOT TAKING COGNIZANCE OF THE FACTS OF APPELLANT AND HAS ERRED IN NOT APPRECIATING THAT 97.13 PERCEN T OF INCOME OF THE APPELLANT IS BASED ON HOURLY CHARGED OUT RATE AND TRANSFER PRICING MARGIN IN RESPECT OF SAME HAS BEEN ACCEPTED. THE BALANCE 2.87 PERCENT OF THE INCOME IN RESPECT OF RENDERING IT ENABLED SUPPORT SERVICES IS ON COST PLUS 15 PERCENT MARGIN METHOD. 15. THE LEARNED AO HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE BY CONTENDING THAT THE MAIN ACTIVITIES OF MCKC ARE SUPPORT SERVICES TO MCKINSEY & CO. INCLUDING PROVIDING SUPPORT RESEARCH ANALYSIS AND INFORMATION SERVICES WHICH CANNOT BE CATEGORISED AS IT ENABLED SERVICES. 16. THE ORDER OF THE LEARNED AO IS BAD IN LAW, CONTRARY TO THE PRINCIPLES OF NATURAL JUSTICE, PRIN CIPLE OF CONSISTENCY AND IS LIABLE TO BE QUASHED. ITA NO.1879/DEL/2014 7 17. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN CHARGING INTEREST UNDER SECTION 234B, SECTION 234C AND SECTION 234D OF THE ACT AT INR 147,784,380; INR 860,706 AND INR 946,875 RESPECTIVELY. 18. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED IN FA CT AND IN LAW IN PROPOSING TO INITIATE PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT AGAINST THE APPELLANT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF MCKINSEY HOLDING INC. WHICH IS FURTHE R A WHOLLY OWNED SUBSIDIARY OF MCKINSEY & CO. INC. ASSESSEE C OMPANY HAS BEEN PROVIDING RESEARCH AND INFORMATION SERVICES AN D IT SUPPORT SERVICES TO ITS GROUP COMPANIES BEING A CAPTIVE CON TRACT SERVICE PROVIDER. DURING THE YEAR UNDER ASSESSMENT, ASSESS EE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS TO THE FOLLOWING EF FECT :- S.NO. NATURE OF INTERNATIONAL TRANSACTION VALUE (IN INR) METHOD USED 1 PROVISION OF RESEARCH AND INFORMATION SERVICES 1,851,463,486 TNMM WITH OP/OC AS PLI 2 PROVISION OF IT SUPPORT SERVICES 55,498,438 3 REIMBURSEMENT OF EXPENSES BY AES 9,471,136 NO BENCHMARKING REQUIRED ITA NO.1879/DEL/2014 8 3. ASSESSEE COMPANY IN ITS TRANSFER PRICING (TP) ST UDY BY TAKING FOUR COMPARABLES IN ORDER TO BENCHMARK ITS T RANSACTION QUA PROVISION OF IT SUPPORT SERVICES COMPUTED THE MEAN MARGIN OF COMPARABLES AT 19.53% AS AGAINST ITS OWN OP/OC AT 1 8% AND TREATED ITS INTERNATIONAL TRANSACTION AT ARMS LENG TH. HOWEVER, TRANSFER PRICING OFFICER (TPO) HAS SELECTED EIGHT C OMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN ITES SEGMENT AND ARRIVED AT THE AVERAGE MEAN MARGIN OF O P/OC AT 27.68%. SO, THE TPO HAS DETERMINED ARMS LENGTH PR ICE OF INTERNATIONAL TRANSACTION ENTERED INTO IN ITS ITES SEGMENT DURING THE YEAR UNDER ASSESSMENT AT RS.72,51,703/- BY TAKI NG AVERAGE MARGIN OF 27.68% AS AGAINST ASSESSEES OPERATING PR OFIT OF RS.84,65,883/- WITH OP/OC MARGIN OF 14.19%. 4. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP B Y WAY OF FILING OBJECTIONS WHO HAS REJECTED THE OBJECTIONS. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIB UNAL BY CHALLENGING THE ORDER PASSED BY THE AO IN CONSONANC E WITH THE DIRECTIONS ISSUED BY THE LD. DRP. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1879/DEL/2014 9 GROUNDS NO.2 TO 6.1 6. GROUNDS NO.2 TO 6.1 ARE ACADEMIC IN NATURE AND N EED NO SPECIFIC FINDINGS. GROUND NO.6.2 7. UNDISPUTEDLY, THE ASSESSEE COMPANY BEING A WHOLL Y OWNED SUBSIDIARY OF MCKINSEY HOLDING INC. IS PROVIDING RE SEARCH AND INFORMATION SERVICES AND IT SUPPORT SERVICES BEING A CAPTIVE SERVICE PROVIDER. LD. TPO HAS NOT DISPUTED TNMM AS THE MOST APPROPRIATE METHOD CHOSEN BY THE ASSESSEE TO BENCHM ARK ITS INTERNATIONAL TRANSACTION. 8. LD. TPO TO BENCHMARK THE INTERNATIONAL TRANSACTI ONS UNDERTAKEN BY THE ASSESSEE IN QUESTION APPLIED FILT ERS TO THE FOLLOWING EFFECT :- (A) COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE F.Y. 2008-09 ARE TO BE EXCLUDED; (B) COMPANIES WHOSE IT SUPPORT SERVICES INCOME IS LESS THAN RS.1 CRORE ARE TO BE EXCLUDED; (C) COMPANIES THAT WERE DECLARED SICK OR HAD PERSISTENT NEGATIVE NET WORTH ARE TO BE EXCLUDED; (D) COMPANIES THAT HAVE CEASED BUSINESS OPERATIONS OR INACTIVE ARE TO BE REJECTED; (E) COMPANIES WHOSE REVENUE FROM SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES ARE T O BE EXCLUDED; ITA NO.1879/DEL/2014 10 (F) COMPANIES THAT HAVE EXPORT SALES OF LESS THAN 75% OF SALES FOR ITES ARE TO BE EXCLUDED; (G) COMPANIES THAT HAVE DIMINISHING REVENUES/PERSISTENT LOSSES FOR THE LAST THREE YEARS UP TO AND INCLUDING F.Y 2008-09 ARE TO BE EXCLUDED; (H) COMPANIES THAT HAVE SUBSTANTIAL TRANSACTIONS [>25%] WITH RELATED PARTIES ARE TO BE EXCLUDED; (I) COMPANIES THAT HAD EXCEPTIONAL YEAR(S) OF OPERATION ARE TO BE EXCLUDED; (J) COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I.E. NOT MARCH 31, 2009) OR WHOSE DATA DOES NOT FALL WITHIN THE RELEVANT 12 MONTH PERIOD, I.E. 01- 04-2008 TO 31-03-2009, ARE TO BE EXCLUDED; (K) COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER COMPANY (TESTED PARTY) ARE TO BE EXCLUDED; (I) COMPANIES THAT ARE HAVING PECULIAR ECONOMIC CIRCUMSTANCES ARE TO BE EXCLUDED; AND (M) COMPANIES THAT ARE DUPLICATED IN THE DATA BASE WITH DIFFERENT NAMES OR MERGED TO FORM ANOTHER COMPANY ARE TO BE EXCLUDED. 9. BY APPLYING THE AFORESAID FILTERS, THE LD. TPO F OR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF T HE ASSESSEE IN ITES SEGMENT SELECTED 8 COMPARABLE COMPANIES AS UND ER :- SL.NO. COMPARABLE COMPANIES OP/OC 1 ADITYA BIRLA MINACS WORLDWIDE LTD. 28.83% 2 COSMIC GLOBAL LIMITED 48.20% 3 ECLERX SERVICES LTD. 47.00% 4 INFORMED TECHNOLOGIES INDIA LTD. 23.13% 5 JEEVAN SOFTECH LTD. 21.26% ITA NO.1879/DEL/2014 11 6 MICROGENETICS SYSTEMS LTD. 9.98% 7 MICROLAND LIMITED 6.14% 8 VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB) 36.93% AVERAGE MARGIN (ARITHMETIC MEAN) 27.68% 10. CONSEQUENTLY, TPO DETERMINED THE ALP OF INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE AT RS.72,51.703/- BY T AKING AVERAGE MARGIN OF THE COMPARABLES AT 27.68% AS AGAINST ASSE SSEES OWN OP/OC MARGIN OF 14.91%.. 11. LD. AR BY FILING PRESENT APPEAL SOUGHT EXCLUSIO N OF FOUR COMPARABLE COMPANIES FROM THE FINAL SET OF COMPARAB LES CHOSEN BY THE LD. TPO, NAMELY, (I) CG-VAK SOFTWARE & EXPORTS LIMITED; (II) R SYSTEMS INTERNATIONAL LIMITED; (III) CEPHA IMAGIN G LIMITED; AND (IV) FORTUNE INFOTECH LIMITED. HOWEVER, DURING THE COURSE OF ARGUMENT, THE LD. AR FOR THE ASSESSEE RESTRICTED HI S ARGUMENTS FOR INCLUSION OF ONLY ONE COMPARABLE, NAMELY, CG-VAK SO FTWARE & EXPORTS LIMITED (SEGMENT) IN THE FINAL LIST OF COMP ARABLES BY RELYING UPON THE ORDER PASSED BY THE TRIBUNAL IN AY 2006-07 IN ASSESSEES OWN CASE AFFIRMED BY THE HONBLE DELHI H IGH COURT. 12. LD. TPO REJECTED THIS CG-VAK SOFTWARE & EXPORTS LIMITED AS AN UNSUITABLE COMPARABLE ON THE GROUND THAT SIGN IFICANT INCOME OF THE ASSESSEE IS FROM SOFTWARE DEVELOPMENT WHEREA S THE INCOME FROM BPO OPERATION IS INSIGNIFICANT. PERUSAL OF TH E FINAL FILTERS ITA NO.1879/DEL/2014 12 ADOPTED BY THE TPO TO SELECT THE COMPARABLE COMPANI ES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS SHOWS T HAT AMONG OTHER FILTERS ONE FILTER ADOPTED BY TPO IS , COMPARABLE COMPANIES WHOSE IT SUPPORT SERVICES INCOME IS LESS THAN RS.1, 00,00,000/- ARE TO BE EXCLUDED. ISSUE AS TO ADOPTING FILTER BY THE LD. TPO LESS T HAN RS.1,00,00,000/- HAS BEEN DEALT WITH BY THE HONBLE HIGH COURT IN ASSESSEES OWN CASE FOR AY 2006-07 IN ITA 217/2014 JUDGMENT DATED 27.03.2015 BY RETURNING THE FOLLOWING FINDINGS :- 13. SO FAR AS THE ARMS LENGTH PRICE (ALP) DETERMINATION AND THE TRANSFER PRICING UPWARD ADJUSTMENTS, ARE CONCERNED, IN ITS TP DOCUMENTATION, THE ASSESSEE DETERMINED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION PERTAINING TO THE PROVISION OF IT SUPPORT SERVICES. THE TPO IN THE ORDER ACCEPTED ONLY 7 OUT OF THE 11 COMPARABLE COMPANIES AND REJECTED THE REST BASED ON REASONS THAT ONE OF THEM, FORTUNE INFOTECH LTD. (FIL) HAD A DIFFERENT FINANCIAL YEAR ENDING, THE OTHER TWO - KIRLOSKAR COMPUTER SERVICES LTD (KCSL) AND MERCURY OUTSOURCING MANAGEMENT LTD. (MOML) HAD A TURNOVER OF LESS THAN RS.1 CRORE AND FINALLY, GENESIS INTERNATIONAL CORPORATION LTD (GICL) WAS REJECTED BECAUSE IT SEEMINGLY HAD A NEGATIVE GROWTH GRAPH. 14. THE REVENUE IS IN APPEAL BEFORE THIS COURT QUESTIONING THE ADMISSIBILITY OF THE ABOVE MENTIONE D COMPARABLES WHILE COMPUTING ARM LENGTH PRICE REGARDING THE IT SUPPORT SERVICES AFTER THE TPO AND AO REJECTED THE ABOVE MENTIONED COMPANIES BUT WAS LATER ALLOWED BY THE CIT (A) AND ITAT. WHILE THE AO HAD CONFIRMED THE FINDINGS OF THE TPO, THE LD. CIT(A) AFTER CONSIDERING THE ASSESSEE'S SUBMISSIONS ITA NO.1879/DEL/2014 13 ACCEPTED ALL THE FOUR COMPANIES REJECTED BY THE TPO . THE REVENUE SUBMITS THAT FORTUNE INFOTECH LTD. WAS CORRECTLY REJECTED BY TPO BECAUSE THE COMPANY HAD DIFFERENT FINANCIAL YEAR ENDING ON DECEMBER, 2006, WHEREAS ASSESSEES FINANCIAL YEAR ENDED ON MARCH, 2006. THERE IS NOTHING SHOWN TO THE COURT THAT SUPPORTS THE REVENUES ARGUMENT THAT THE ITAT FELL INTO ERROR IN HOLDING THAT IF A COMPARABLE IS FOLLOWING DIFFERENT FINANCIAL YEAR THEN THE SAME CANNOT BE INCLUDED IN THE LIST OF COMPARABLES SELECTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. THEREFORE, THE ITAT HAS HELD THAT IF T HE COMPARABLE IS FUNCTIONALLY SAME AS THAT OF TESTED PARTY THEN SAME CANNOT BE REJECTED MERELY ON THE GROUND THAT DATA FOR ENTIRE FINANCIAL YEAR IS NOT AVAILABLE. IF FROM THE AVAILABLE DATA ON RECORD, TH E RESULTS FOR FINANCIAL YEAR CAN REASONABLY BE EXTRAPOLATED THEN THE COMPARABLE CANNOT BE EXCLUDED SOLELY ON THE GROUND THAT THE COMPARABLES HAVE DIFFERENT FINANCIAL YEAR ENDINGS 15. AS FAR AS KCSL AND MOML ARE CONCERNED, (AGAIN, REJECTED BY THE TPO) TYPICALLY A FILTER OF COMPANIES WITH LESS THAN A TURNOVER OF RS.1 CRORE I S APPLIED FOR SELECTING THE COMPARABLES. ACCORDING TO THE AVAILABLE DATA, THE TURNOVER OF THESE TWO COMPANIES WAS LESS THAN RUPEES ONE CRORE. HOWEVER, IF THIS FILTER IS APPLIED THEN, AS SUBMITT ED BY COUNSEL FOR THE ASSESSEE, THE COMPANIES WITH A HIGHER TURNOVER ALSO SHOULD HAVE BEEN REJECTED WHICH WAS NOT THE CASE IN THE SAID TP ADJUSTMENTS. RULE 10B (2) TO (4) OF THE INCOME TAX RULES ARE RELEVANT FOR THIS PURPOSE. THEY ARE EXTRACTED BELOW : 10-B(2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABILITY OF AN I INTERNATIONAL 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; ITA NO.1879/DEL/2014 14 (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND THE GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD.' RULE 10B (3) STIPULATES THE THIRD STEP, AND SPELLS OUT WHEN THE TPO IS OBLIGED TO HOLD AN UNCONTROLLED TRANSACTION AS COMPARABLE WITH OTHERS. THIS PROVISION READS AS FOLLOWS: (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION IF- ITA NO.1879/DEL/2014 15 (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. RULE 10B (4) PROVIDES WHAT SHOULD BE THE BASIS OF THE CALCULATIONS IN TERMS OF DATA, ITS CONTEMPORANEITY, ETC. IT STIPULATES THAT : (4) THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. IT IS EVIDENT, THEREFORE, THAT FUNCTIONAL SIMILARIT Y OF THE COMPARABLE ENTITY IS EMPHASIZED; EVERY EFFORT MUST BE MADE IN THE ALP DETERMINATION TO ENSURE THAT THE MATERIAL EFFECTS OF DIFFERENCES BETWEEN THE TESTED PARTY AND THE COMPARABLE MUST BE ELIMINATED. IN OUR OPINION, THE ITAT DID NOT FALL INTO ERROR IN HOLDING THAT THE TWO COMPARABLES COULD NOT BE REJECTED ON THE GROUND RELATING TO TURNOVER THRESHO LD OF RS.1 CRORE. ITA NO.1879/DEL/2014 16 13. RATIO OF THE JUDGMENT IN ASSESSEES OWN CASE (S UPRA) IS IN CASE OF FUNCTIONAL SIMILARITY BETWEEN THE COMPARABL ES AND THE ASSESSEE, THE SAME CANNOT BE REJECTED ON THE GROUND THAT THE DATA FOR THE ENTIRE FINANCIAL YEAR IS NOT AVAILABLE PART ICULARLY WHEN THE RESULT FOR THE FINANCIAL YEARS CAN BE REASONABLY EX TRAPOLATED; AND THAT A COMPANY CANNOT BE REJECTED MERELY ON THE GRO UND THAT IT DOES NOT PASS THE FILTER OF TURNOVER OF RS.1,00,00, 000/-. 14. WHEN IT IS NOT IN DISPUTE THAT THE COMPARABLE C OMPANY, NAMELY CG-VAK SOFTWARE & EXPORTS LIMITED IS A LISTE D COMPANY, ITS QUARTERLY RESULTS ARE AVAILABLE IN PUBLIC DOMAI N AND THERE IS NO NEED EVEN FOR EXTRAPOLATING THE RESULT. SO, IN THE SE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT THIS COMPARABLE COMPANY IS A SUITABLE COMPARABLE COMPANY AND CONSEQUENTLY, THIS ISSUE IS REMANDED TO THE LD. TPO TO BENCHMARKING THE INTERNA TIONAL TRANSACTION IN QUESTION BY INCLUDING THIS COMPARABL E IN THE FINAL SET OF COMPARABLES BY VERIFYING THE QUARTERLY RESULTS A VAILABLE IN THE PUBLIC DOMAIN AS THIS COMPANY IS A LISTED COMPANY. SO, WE DETERMINE GROUND NO.6.2 IN FAVOUR OF THE ASSESSEE F OR STATISTICAL PURPOSES. GROUND NO.7 15. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNE D ORDER CONTENDED THAT THE AO HAS COMMITTED COMPUTATIONAL E RROR IN THE ITA NO.1879/DEL/2014 17 MARGIN OF THE COMPARABLE COMPANIES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS DESPITE THE FACT THAT TH IS ISSUE WAS RAISED BEFORE LD. DRP AND A SPECIFIC ORDER WAS PASSED IN T HIS REGARD. FOR FACILITY OF REFERENCE, ARGUMENT ADDRESSED BY LD. AR BEFORE THE LD. DRP AND FINDINGS THEREOF ARE REPRODUCED FOR READY P ERUSAL AS UNDER :- 10.1 THE ASSESSEE HAS POINTED OUT CERTAIN 'COMPUTATIONAL ERROR IN MARGINS OF ASSESSEE AND COMPARABLES. THE ASSESSEE HAS POINTED OUT THAT WHEREAS FBT HAS BEEN EXCLUDED FOR COMPUTATION OF MARGIN IN CASE OF COMPARABLES, IT HAS BEEN INCLUDED IN CASE OF THE ASSESSEE. FURTHER, UNIFORM TREATMENT HAS NOT BEEN GIVEN TO GAINS/LOSS FROM FOREIGN EXCHANGE FLUCTUATIONS WHILE COMPUTING MARGINS OF THE ASSESSEE AND THOSE OF COMPARABLES. 10.2 DRP HAS CONSIDERED THESE ARGUMENTS. THE TPO IS DIRECTED TO TAKE FBT AS NON-OPERATING EXPENSE IN CASE OF ASSESSEE ALSO WHEN IT HAS BEEN TAKEN SO IN CASE OF COMPARABLES. FURTHER, GAINS/LOS S FROM FOREIGN EXCHANGE FLUCTUATIONS BEING NON- OPERATING ITEMS EVEN AS PER SAFE HARBOR RULES SHOUL D BE TREATED SO IN CASE OF BOTH COMPARABLES AND THE ASSESSEE. ACCORDINGLY, TPO IS DIRECTED TO VERIFY TH E CONTENTION OF THE ASSESSEE AND TAKE CORRECT FIGURES . THE OBJECTION IS DISPOSED OF ACCORDINGLY. 16. HOWEVER, THE LD. TPO/AO HAVE FAILED TO TAKE INT O ACCOUNT FBT AS NON-OPERATING EXPENSE IN CASE OF ASSESSEE PA RTICULARLY WHEN IT HAS BEEN TAKEN IN CASE OF COMPARABLE COMPAN IES. WHEN THE TPO HAS FAILED TO COMPLY WITH THE DIRECTIONS IS SUED BY THE LD. ITA NO.1879/DEL/2014 18 DRP, THE ASSESSEE COMPANY MOVED APPLICATION U/S 154 OF THE ACT BEFORE LD. TPO ON 03.04.2013 BY MAKING FOLLOWING SU BMISSIONS :- 1. ERRONEOUS COMPUTATION OF MARGIN OF MCKC IN THE SUBJECT ORDER IT HAS BEEN OBSERVED THAT FRIN GE BENEFIT TAX ('FBR) HAS BEEN EXCLUDED WHILE COMPUTING THE OP ERATING MARGINS OF THE COMPARABLE COMPANIES. HOWEVER, WHILE COMPUTING THE OPERATING COST AND ACCORDINGLY THE OP ERATING PROFIT OF MCKC YOUR OFFICE HAS FAILED TO EXCLUDE TH E FBT EVEN THOUGH THIS ITEM HAS BEEN EXCLUDED WHILE COMPU TING THE MARGINS OF COMPARABLE COMPANIES, AFTER EXCLUDING FB T (AMOUNTING TO INR 713,851), THE OPERATING COST OF M CKC IS REDUCED FROM INR 5,673,185 TO INR 56,069,33.3 AND ACCORDINGLY THE CORRECT MARGIN OF MCKC WORKS OUT TO 16.37 PERCENT AS AGAINST 14.91 PERCENT AS COMPUTED BY YOU R OFFICE. THE ABOVE BEING A MISTAKE APPARENT FROM RECORD, IS LIABLE TO BE RECTIFIED UNDER SECTION 92CA(5) READ WITH SECTIO N 154 OF THE ACT. THE CORRECT COMPUTATION OF MARGIN OF MCKC AFTER EXC LUDING FBT IS PRESENTED BELOW: AMOUNT IN INR PARTICULARS AS PER TP ORDER CORRECT COMPUTATION OPERATING REVENUE 65,249,068 65,249,068 OPERATING COST 56,783,185 56,069,334 OPERATING PROFIT 8,465 ,883 9,179,734 OPERATING MARGIN 14.91 PERCENT 16.37 PERCENT CONSEQUENTLY, THE TRANSFER PRICING (TP) ADJUSTMEN T AS PROPOSED BY YOUR OFFICE IN THE SUBJECT ORDER SHOULD BE COMPUTED TAKING INTO CONSIDERATION THE CORRECTED CO ST BASE (AS COMPUTED IN THE TABLE ABOVE) OF MCKC. 17. STRANGELY ENOUGH, EVEN APPLICATION FILED ON 03. 04.2013 HAS NOT BEEN DISPOSED OFF TO EXCLUDE THE FBT IN CASE OF ASSESSEE AS THE SAME HAS BEEN EXCLUDED WHILE COMPUTING THE MARGINS OF COMPARABLE COMPANIES. EVEN, LD. SENIOR DR ATTENDIN G THE CASE FOR THE LAST THREE YEARS HAS NOT PREFERRED TO DIRECT TH E QUARTER CONCERNED ITA NO.1879/DEL/2014 19 TO COMPLY WITH THE DIRECTIONS ISSUED BY HIGHER REVE NUE AUTHORITIES, THE LD. DRP IN THIS CASE. THIS IS A C ASE OF COMPLETE LACK OF EMPATHY AND VOLUNTARISM ON THE PART OF LOWE R REVENUE AUTHORITIES BY NOT COMPLYING WITH THE ORDER OF THE HIGHER AUTHORITIES. SO, WE HEREBY DIRECT THE TPO/AO TO CO MPLY WITH THE DIRECTIONS ISSUED BY THE LD. DRP TO EXCLUDE FBT WHI LE COMPUTING THE MARGINS OF ASSESSEE AS HAS BEEN DONE IN CASE OF COMPARABLE COMPANIES TO ARRIVE AT A CORRECT COMPUTATION OF THE MARGINS OF ASSESSEE AS WELL AS COMPARABLE COMPANIES. SO, GROU ND NO.7 IS DETERMINED IN FAVOUR OF THE ASSESSEE FOR STATISTICA L PURPOSES. GROUND NO.8 18. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNE D ORDER CONTENDED THAT TPO/AO/DRP HAVE ERRED IN NOT CONSIDE RING GAINS/LOSSES ARISING OUT OF FOREIGN EXCHANGE FLUCTU ATIONS WHILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE CO MPANIES AS WELL AS ASSESSEE FOR IT SUPPORT SERVICES AN RELIED UPON DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE BEARING ITA NO. 154/DEL/2016 ORDER DATED 1 5.12.2016 . FOR READY PERUSAL, FINDINGS RETURNED BY THE COORDIN ATE BENCH OF THE TRIBUNAL ARE REPRODUCED FOR READY PERUSAL AS UNDER :- 64. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPEAL IS AGAINST THE TREATMENT OF FOREIGN EXCHANGE (FOREX) GAIN/LOSS AS AN ITEM OF OPERATING NATURE IN ITA NO.1879/DEL/2014 20 THE COMPUTATION OF THE ALP OF BOTH THE TRANSACTIONS . THE LD. DR. SUBMITTED THAT SUCH FOREX GAIN/LOSS WAS RIGHTLY CONSIDERED BY THE TPO AS NON-OPERATING IN THE COMPUTATION OF THE ALP AND HENCE SUCH A VIEW SHOULD NOT HAVE DISTURBED. THIS WAS OPPOSED BY THE LD. AR, WHO CONTENDED THAT FOREX GAIN/LOSS RELATES TO THE TRADING TRANSACTIONS OF THE ASSESSEE AND HENCE THE SAME WAS OPERATING IN THE COMPUTATION OF OP/OC UNDER THE TNMM. 65. WE FIND MERIT IN THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE ABOUT THE INCLUSION OF FOREI GN EXCHANGE GAIN/LOSS IN THE OPERATING REVENUE/COSTS O F THE ASSESSEE AS WELL AS THAT OF THE COMPARABLES. WHEN WE ADVERT TO THE NATURE OF SUCH FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE, IT HAS NOT BEEN CONTROVERTED BY THE LD. DR THAT THE SAME IS IN RELATION TO THE TRADING ITEMS EMANATING FROM THE INTERNATIONAL TRANSACTIONS. IF THE FOREIGN EXCHANGE GAIN/LOSS DIRECTLY RESULTS FROM THE TRADING ITEMS, WE FAIL TO APPRECIATE AS TO HOW SUCH FOREIGN EXCHANGE FLUCTUATION LOSS CAN BE CONSIDERED AS NON-OPERATING . 66. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS PRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEEDS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WENT ON TO ADD TH AT WHEN GOODS ARE EXPORTED AND INVOICE IS RAISED IN CURRENCY OF THE COUNTRY WHERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE AMOUNT IS REALIZED IN THAT FOREIGN CURRENCY AND THEN CONVERTED INTO INDIA N RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO THE EXPOR TS. IN FACT, IT IS ONLY THE TRANSLATION OF INVOICE VALU E 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 ITA NO.1879/DEL/2014 21 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. 67. 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 TRILOGY E BUSINESS SOFTWARE INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANGALORE). THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRA VS ADDTL. CIT (2013) 32 TAXMAN.COM 196 HAS ALSO LAID DOWN TO THIS EXTENT. 68. 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. THER E IS NO DOUBT THAT IN SUCH RULES, FOREX GAIN/LOSS HAS BEEN TREATED AS NON-OPERATING. HOWEVER IT IS RELEVA NT TO NOTE THAT SUCH RULES ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. EVEN THE RELIANCE OF THE LD. DR ON CERTAIN DECISIONS TAKING COGNIZANCE OF SAFE HARBOUR RULES FOR THE PERIOD ANTERIOR TO THEIR INSERTION IN OTHER CONTEXTS DOES NOT IMPROVE THE CASE OF THE DEPARTMENT BECAUSE THE HONBLE DELHI HIGH COURT IN PR. CIT VS. CASHEDGE INDIA PVT. LTD., VIDE ITS JUDGMENT DATED 4.5.2016 I N ITA 279/2016, HAS HELD THAT : `SO FAR AS THE QUESTION OF FLUCTUATION OF FOREIGN EXCHANGE WAS CONCERNED, THE ITAT RULED THAT THE RELEVANT PROVISION, I.E. `SAFE HARBOUR RULES HAD NOT BEEN NOTIFIED FOR THE CONCERNED ASSESSMENT YEAR AND WERE , THEREFORE, INAPPLICABLE. THUS THE HONBLE HIGH COURT DID NOT DISTURB THE OPERATING NATURE OF FOREX GAIN/LOSS AS HELD BY THE TRIBUNAL. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF REVENUE TRANSACTIONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING ITA NO.1879/DEL/2014 22 REVENUE/COST, BOTH FOR THE ASSESSEE AS WELL AS THE COMPARABLES. THE GROUND TAKEN BY THE DEPARTMENT IS, THEREFORE, DISMISSED. 19. FOLLOWING THE DECISION RENDERED BY THE COORDINA TE BENCH IN ASSESSEES OWN CASE FOR AY 2011-12, WE HEREBY DIREC T LD. TPO TO CONSIDER THE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS F ROM FOREIGN EXCHANGE FLUCTUATION BEING NON OPERATING ITEMS AS P ER SAFE HARBOUR RULES WHILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANY AS WELL AS ASSESSEE COMPANY FROM PROVISIONS OF IT SUPPORT SERVICES. HENCE, GROUND NO.8 IS DETER MINED IN FAVOUR OF THE ASSESSEE FOR STATISTICAL PURPOSES. GROUNDS NO.9 TO 18 20. GROUNDS NO.9 TO 18 ARE NOT PRESSED. 21. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF AUGUST , 2017. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 30 TH DAY OF AUGUST, 2017 TS ITA NO.1879/DEL/2014 23 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.
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