Income Tax Act, 1961

--Transfer pricing--Computation of ALP Selection of comparable companies--Assessee was a wholly owned subsidiary of 'C', the AE being a company based in USA. Assessee is engaged in business of providing Income Tax enabled services (ITES) and business support services and other similar services. Assessee had international transaction with its AE and to compute ALP, TNMM was adopted. However, for selection of companies which were comparable to assessee, TPO as well as DRP excluded the companies selected by assessee. Held: Companies with extra-ordinary circumstances like those which suffered events like merger/demerger, impacting the financial results, surplus normal profits, functionally different as well as intermediary having outsourced its activity cannot be considered as comparables.

It is found from the orders of the DRP that though the assessee has made detailed arguments, specifically objecting to the selection of the aforesaid companies as comparables, the DRP has not properly considered the contentions raised by the assessee and has passed a very cryptic orders bereft of detailed reasons in support of the conclusions drawn. [Para 22] To sum up, conclusions are - (a) companies with extra-ordinary circumstances, like those which suffered events like merger/de-merger, impacting the financial results, could not be treated as comparables; (b) Companies having supernormal profit cannot be considered as comparable; (c) Companies which are functionally dissimilar cannot be taken as comparables; (d) Companies acting merely as intermediary having outsourced its activity cannot be considered as comparable; (e) Companies whose directors were involved in fraud cannot be taken as comparable, as their financial results are not reliable; and (f) companies, who are industrial giants and market leaders having substantially high turnover exceeding Rs.200 crores cannot be taken as comparables. In the aforesaid view of the matter, orders of the DRP as well as the assessment order passed under section 143(3) read with section 144C were set aside and the matter was restored to the file of the TPO, who would determine the ALP afresh in the light of observations/directions hereinabove. [Para 23]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961 Section 92CA

Income Tax Act, 1961 Section 144

Income Tax Act, 1961

--Transfer pricing --Computation of ALP Non-consideration of gain/loss on account of foreign exchange fluctuations--TPO had not considered the foreign exchange fluctuation gain/loss while determining ALP by observing that they do not relate to business operation of assessee which had been confirmed by the DRP. Held: Foreign exchange fluctuation gain/losses cannot be excluded from the computation of ALP.

For the assessment year 2008-09 foreign exchange fluctuation gain/loss has been considered as operating margin while computing the margin of comparable companies, even for the year under appeal also the same principle should be applied, and while computing the margin for determining the ALP for the assessment year under appeal, the foreign exchange gain/loss has to be taken as part of the operating margin. Consequently, the ground of the assessee is allowed on this issue and the assessing officer is directed to treat the foreign exchange fluctuation gain/loss as part of the operating margin of the comparable company. [Para 27]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961 Section 92CA

Income Tax Act, 1961 Section 144C

In The ITAt, Hyderabad a Bench

Shri Chandra Poojari, A.m. & Saktijit Dey, J.m.

Capital IQ Information Systems (India ) Pvt. Ltd. v. Dy. CIT

ITA No.1961/Hyd/2011

A.Y.2007-08

23 November, 2012

Appellant by : G. C. Srivastava

Respondent by : V. Srinivas

Saktijit Dey, J.M.

This appeal by the assessee arises out of the assessment order dated 11-10-2011 passed under section 143(3) read with section 144C of the Act, on the directions of the Dispute Resolution Panel (DRP). The appeal pertains to the assessment year 2007-08.

2. The factual matrix as emanates from the record are the assessee is a wholly owned subsidiary of Capital IQ Inc., the Associated Enterprise (AE), being a company based in USA. The assessee is engaged in the business of providing IT-enabled Services(ITES) and business support services, such as financial reports/related documents, technical service for development of software and other similar services to its AE on a cost plus mark up basis. For the impugned assessment year, the assessee filed a return of income declaring the total income at Rs. 8,29,06,660. During the relevant financial year, the assessee had the following international transactions with its AE.