ITA No.64/Del./2015

SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER

For The Assessee : Shri Sachit Jolly, Rahul Satija and Gautam Swarup, Advocates
For The Revenue : Shri Amrendra Kumar, CIT DR Ms. Y. Kakkar, Senior DR

ORDER

A.T. VARKEY, JUDICIAL MEMBER :- This appeal, at the instance of the assessee is directed against the order dated 31.12.2014 u/s 143(3) read with section 144C of the Income Tax Act, 1961 (hereinafter “the Act”) in pursuance to directions of DRP dated 14.11.2014 for the Assessment Year 2010-11.

2. In this appeal, the following grounds have been raised by the assessee :-

“1. That on facts and circumstances of the case and in law, final assessment order passed by the Assessing Officer (“AO”) is in complete disregard of the provisions of Section 144C(13) of the Income tax Act, 1961 (the “Act”) inasmuch that the AO failed to pass the said Order in conformity with the binding and mandatory directions issued by the Dispute Resolution Panel (“DRP”) and consequently the Order is non-est, illegal and bad in law.

2. That the AO and Transfer Pricing Officer (“TPO”) erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section 144C(13) of the Act by not allowing working capital adjustment as directed to be allowed by the DRP.

3. That the AO and TPO erred in alleging that the Appellant did not provide the reliable data even after numerous follow-ups, ignoring the following facts:

(i) Letter dated 5.12.2014 filed with the TPO for recomputing the Transfer pricing adjustment in accordance with Directions of DRP;

(ii) In any event, in term of section 144C(13) of the Act, the AO has to pass an order giving effect to the findings of the DRP without providing any opportunity to the Assessee.

(iii) Without prejudice, the directions issued by the DRP are in respect of the comparables chosen by the TPO, therefore there was no burden on the Appellant to file any details before the TPO.

4. That on facts and circumstances of the case and in law, the AO erred in assessing the total income of the Appellant at Rs. 1,18,99,028/- as against NIL income returned by the Appellant after making transfer pricing addition of Rs. 1,18,93,486/- in respect of international transaction of software development Services rendered by the Appellant to its parent company, viz., CashEdge Inc.

5. That the AO erred on facts and in law in making an addition of Rs. 1,18,93,468/- to the book profits of the Appellant for the purposes of Section 115JB of the Act and thereby assessing the book profits of the Appellant at Rs. 2,56,61,736/- without appreciating that book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2) and transfer pricing adjustment is not one of the classes of adjustments provided in that Explanation.

6. That on facts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm’s length price in respect of international transaction entered into by the Appellant with its AE using the most appropriate method (i.e. the Transactional Net Margin Method), maintained all the information and documentation required under section 92D of the Act, used information/data available in the database (Prowess database and Capitaline database) at the time of filing the income tax return on a bonafide belief that the data in the database is reliable and correct and had furnished the Transfer Pricing Study (“TP Study”).

7. That the AO and DRP erred in confirming the action of the TPO in rejecting the Transfer Pricing Study of the Appellant and in conducting a fresh benchmarking analysis on the basis of conjectures and surmises.

8. That the AO and DRP erred in confirming the order passed by the TPO without appreciating that the TPO erred in rejecting the functional filters applied by the Appellant in its TP Study.
9. That on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters:
a) Use of only current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for the FY 2009-10 was not available in the public domain;
b) Rejecting companies with turnover below Rs. 5 crore;
c) Rejecting companies whose ratio of service income to total income is less than 75%;
d) Rejecting companies whose export revenues are less than 75% of the operating revenues without appreciating that the said filter has no effect on comparability analysis;
e) Rejecting companies where related party transactions exceeds 25% of sales without appreciating that companies with any related party transactions should have been excluded or else companies with RPT of more than 10-15% to sales should have been excluded;
f) Rejecting companies with employee cost less than 25% of total cost for the period under consideration;
g) Rejecting companies with diminishing revenue/ persistent losses in complete contradiction of the filter of single year data applied by the TPO himself;
h) Rejecting companies with different financial year ending without appreciating that the said filter would produce defective comparables;
i) Rejecting R&D filter used by the Taxpayer.

10. That the AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Appellant without providing any cogent and sufficient reasoning.

11. That the AO and DRP erred in confirming the action of the TPO in not excluding Wipro Technology Services Ltd. from the list of comparable without appreciating that the said had turnover of more than Rs. 200 crores, the company failed the TPO’s own filter of extraordinary event during the year, i.e., awarding of a fixed contract in lieu of acquisition by Wipro Ltd. and had significant RPT during the year under consideration.

12. That the TPO and the DRP erred in retaining Wipro Technology Services Ltd. as a comparable without appreciating that signed accounts of the Company were not available in the public domain and inspite of the specific directions of the DRP, the TPO failed to provide a copy of the accounts of the said Company.

13. That the TPO erred on facts and in law in including Zylog Systems Ltd. in the final set of comparables without appreciating that (i) the company deals in software products and the revenue of the company is derived from licensing software products; (ii) peculiar circumstances like acquisitions were done by the company during the relevant assessment year and (iii) no segmental financials were maintained by the company.

14. That the TPO erred on facts and in law in including Persistent Systems Limited as a comparable company without appreciating that (i) the company was functionally dissimilar and engaged in product development;(ii) non-availability of segmental information;(iii) there was acquisition and restructuring and (iv) the said Company had turnover of more than Rs. 200 crores.

15. That the TPO erred on facts and in law in excluding Vama Industries from the list of comparables even though the Company had passed all the filters applied by the TPO.

16. That the AO and DRP erred in confirming the action of the TPO in treating foreign exchange gain/loss as non-operating item while computing the margin of the Appellant and comparable companies and holding that it will have no impact on pricing.

17. That the AO and DRP erred in confirming the action of the TPO in not allowing risk adjustment claimed by Appellant in terms of Rule 10B(1)(e) read with Rule 10B(3) of the Income tax Rules, 1962.

18. Without prejudice, the AO/TPO erred in denying the claim of benefit of standard deduction of +/- 5% contained in the proviso to Section 92C(2) of the Act to the Appellant.

19. That the Ld. AO erred on facts and in law in mechanically initiating penalty proceeding under Section 271(1)(c) of the Act without recording any adequate satisfaction for such initiation.”

3. During the relevant assessment year, the assessee rendered software development and business support services to its AE viz. CashEdge Inc., USA. For this it was compensated based on the terms of the Professional Services Agreement dated 31.12.2003 entered between both the entities on cost plus basis. As per the transfer pricing (TP) document furnished for the AY 2010-11, the taxpayer company has entered into the following international transaction with its associated enterprises (AEs):

4. The arm’s length price of the international transactions representing software development services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee is arrived at 11.16% on cost; whereas the average PLI of the comparables is arrived at 6.90% as per the analysis in the TP document. It is further seen that average Profit Level Indicator (PLI) was directed on the basis of 14 comparables selected by the tax payers. The mean margin of the comparables selected by the assessee as stated above was 11.91% and since the profit margin of the assessee was within +/- 5% range of the mean margin of the comparables, no transfer pricing adjustment was offered in the return of income. The results as submitted by the tax payer can be summarized as under:

5. The TPO vide an order dated 24.01.2014 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparable selected by the assessee. Thereafter the TPO selected a list of 10 comparables and proposed an adjustment of Rs. 1,47,63,279/- by computing the mean Profit Level Indicator (PLI) of the comparable companies at 23.68% as against PLI of 11.16% of the assessee.

6. Thereafter Dispute Resolution Panel (DRP) vide order dated 14.11.2014, upheld the adjustment made by the TPO, subject to -

a. exclusion of two comparables,
b. the claim of working capital adjustment as per the OECD Methodology,
c. furnishing the annual report of Wipro Technology Services Ltd. to the assessee and
d. directed to re-compute the operating margin of the assessee as well as comparable companies as per the guidelines provided by Safe Harbor Notification dated 18.09.2013.

7. As per the said directions, revised final list of the comparable companies is as under :-

8. As a result of the above, the final assessment was completed vide order dated 31.12.2014, passed u/s 143(3) r.w.s. 144C of the IT Act, 1961 (the Act) assessing the total income of the assessee at Rs. 1,18,99,030/- under normal provisions of the Act and Rs. 2,56,61,736/- under MAT after making a transfer pricing addition of Rs. 1,18,93,468/- which has been computed as under:-

9. During the course of hearing, the learned counsel for the assessee Shri Jolly submitted that since the Order passed by the TPO after directions were issued by the DRP was not in conformity with the directions of the DRP (insofar as allowance of working capital adjustment and furnishing the annual report of Wipro Technology Services Ltd.), the subsequent proceedings are without jurisdiction. However, he submitted that he does not wish to press the ground in this appeal, but the issue may be kept open to be taken up in an appropriate matter. Accordingly, this ground is dismissed as not pressed but the question of law is left open.

10. Without prejudice, the Counsel for assessee submitted that all his contentions vis-à-vis other grounds raised in the memo of appeal be confined to following issues:

(a) Exclusion of the following comparables from the list which was finally selected by the DRP:
i. Persistent Systems Ltd.
ii. Wipro Technology Services Ltd.
iii. Zylog Systems Ltd.
(b) treatment of foreign exchange fluctuation gain/loss as operating item; and
(c) Addition of transfer pricing adjustment to income assessed under Section 115JB (MAT).
11. We have considered the rival submissions and perused the material on record. First, taking up the each of the comparables contested and disputed by the assessee in this appeal.

PERSISTENT SYSTEMS LTD. (PERSISTENT)

12. The case of the assessee is that Persistent is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and products is not available. It is also argued that on the same principle, Persistent has been deleted, inter alia, in the case of group company of the assessee, viz. Fiserv India Pvt. Ltd. in ITA No.6737/Del/2014 vide Order dated 26.06.2015.

13. The DRP repelled the objection of the assessee as under:
“The taxpayer primarily wants this comparable to be excluded on account of
• Functionally Different
• Significantly high turnover
• Significant RPT>10%

“The company is involved in diversified activities like testing, professional services and customer support (Source page 76 of Annual Report March 2010)”

However, as per P-82/AR
“Income
The company is engaged in providing outsourced product development services to Independent Software Vendors (ISVs) and Enterprises. The company derives a significant portion of its revenues from export of software services and products.”

It can be seen from the above this company is engaged in software development services hence it is good comparable
As mentioned above that in a service industry there is no direct co relation between profitability and high turnover.
Further as discussed above the RPT filter of 25% is held to be a valid filter.
Hence the taxpayer’s objection in this regard is rejected.”

14. Before us the learned counsel, vide written submissions, submitted as under:

“Functionally dissimilar: It is submitted that the company is not only engaged in software development services but also sale of software products and licenses.

It is seen that the company deals in products like Wave Relay®, Android™ Kit, Integration Board Gen4, Quad Radio Router, Tracking Antenna System, Management Tools, Cloud Relay™, Firefighting Kit etc.

Diversified business v. Software development services
Turnover of Rs. 504 crores as compared to Rs. 13 crores of the Assessee
Domestic sale of Rs. 30 cores as compared to NIL of the Assessee

The Hon’ble ITAT in the case of the Assessee’s group company (Fiserv India Ltd.) vide Order dated 26.06.2015 in ITA No.6737/Del/2014 for AY 2010-11 has excluded the said comparable since it is engaged in diversified business activities.”

The counsel for the assessee has contended that Persistent Systems Ltd. is functionally different from the assessee as the company is into software development services as well as software products unlike the assessee who is a captive service provider. Moreover, no segmental details are available in the annual report. It can be thus derived that the prices may have been influenced.

15. The Ld. Sr. DR, on the other hand, contended that the assessee also assists its parent company in development of products ultimately sold by the parent company and, therefore, the business of the assessee is similar to the business of Persistent Systems.

16. We have considered the rival submission and perused the material on record. A co-ordinate Bench of the Delhi Tribunal in the case of Ciena India Pvt. Ltd. v. DCIT in ITA Nos. 2948, 3324/Del/2013, has held as under

“9.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs. 288.93 million as against the revenue from software development services at Rs. 4829.57 millions. Though this company is more engaged in software development services, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on entity level also, inter alia, include revenue from product licences. As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. Further, there is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables.”

Similarly, in the case of assessee’s group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables.

17. Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and products is not available and the ld DR, could not controvert this fact, so we concur with the order of co-ordinate bench of the Tribunal, and we direct exclusion of Persistent Systems Ltd. from the list of comparables .

ZYLOG SYSTEMS LTD. (ZYLOG)

18. The case of the assessee is that Zylog is not only engaged in software services but also software and hardware products and the revenue of the company is also derived from licensing of software products. It is submitted that there is no segmental information regarding revenues of Rs. 968.19 crores which, as per the annual report of Zylog, is derived both from services and products. It was further submitted that the assessee had included Zylog Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO.

19. The DRP repelled the objection of the assessee as under:

“As regards Zylog Systems Ltd. since the taxpayer himself has selected this company as a valid comparable and therefore as discussed above this company cannot be taken out because of high turnover filter. Hence, it is a valid comparable since it appeared in the taxpayer’s TP study also and clears all the filters used by TPO.”

20. Before us the learned counsel, vide written submissions, submitted as under:

“Functionally dissimilar: it is submitted that the company is not only engaged in software services but also products and the revenue of the company is derived from licensing of software products. The company deals in software products like Bank Companion- Mobile Banking Software, Closed Loop Marketing Software- CLM, INFORManufacturing & Distribution, TalentFlow, Pharmetrix etc.

During the year, Zylog implemented orders for smart cards for State of Karnataka which demonstrates that it develops both software and hardware products.

Zylog also invested in establishing Wi-Fi network Tamil Nadu, Karnataka and Andhra Pradesh

13.4% of the total revenue of the company is from products and solutions and another 21.7% from Consulting business. Only 38.8% of the total revenue is from Services. Accordingly, Zylog cannot be taken as a comparable.”

21. We have considered the rival submissions and perused the material on record. At first, we must record that he assessee had included Zylog Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO. Therefore, the DRP was not correct in holding that the assessee had himself selected Zylog. We also find from a perusal of the annual report that Zylog is not only engaged in software services but also software products and the revenue of the company is also derived from licensing of software products. Therefore, Zylog cannot be said to be a valid comparable at the entity level.

22. Further, as per annual report of Zylog the revenues from sale of services and products is Rs. 968.19 crores, however, the TPO in its Order has taken operating revenues of Zylog at Rs. 783.52. The basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores is however not spelt out in the order by the TPO. During the course of hearing also the Ld. DR could not provide any basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores.

23. In view of the aforesaid, we deem it proper to set-aside the issue of inclusion/exclusion of Zylog back to the file of the TPO for reconsideration. Needless to mention, the TPO shall decide on this aspect after allowing the assessee adequate opportunity of being heard. However, we make it clear that unless audited segmental data for the software development services segment of Zylog is available, which satisfies all filters applied by the TPO, the said company cannot be treated as comparable on an entity level.

WIPRO TECHNOLOGY SERVICES (WTS)

24. The case of the assessee is that WTS should be excluded from the list of comparable since complete annual report of the company is not available in public domain; it has been deleted as such in the case of Agnity India Technologies for the same AY 2010-11 due to functional dissimilarity and in any case, it fails the filters applied by the TPO himself.

25. The DRP repelled the objection of the assessee as under:

“At the very outset since taxpayer has objected this company also on the ground that the annual data is not available, therefore TPO is directed to provide the necessary data to the taxpayer.

Reference website indicates that the “company is involved in the provision of program management and third party information security assessment services to businesses that outsource technology and operations to third party vendors in India. The company also offers software quality management, quality assurance, and business process management services, as well as technology infrastructure support, development, and deployment for strategic software applications to information technology and business professionals. The company’s technology infrastructure services include data security, systems administration, change management, database administration, log reviews and controls etc.”
Annual report of the company is available. It is providing software development services and has been classified as such in Prowess database. It is very difficult to find an IT company which is providing exactly same service as that of the taxpayer. Even the taxpayer have not been able to provide comparables which are doing exactly same activity.

Besides, while applying TNMM, different verticals and also minor functional differences between the companies do not matter. Services being provided by the company are in nature of IT services and therefore it is a good comparable.”

26. Before us the learned counsel, vide written submissions, submitted as under :-

“This company did not feature in the accept/reject matrix applied by the TPO. However, it was included arbitrarily included in the final set of comparable without giving any background or approach as to how this comparable has been included in the final set. In fact, the TPO has erroneously presumed that Wipro Ltd. and Wipro Technology Services Ltd are the same companies.

At the outset, it is submitted that the Delhi Bench of the Tribunal in the case of Agnity India for the AY 2010-11 (ITA No.955/Del/2015) has held the company to be incomparable for detailed reasons set out in that decision. The facts obtaining in the case of Agnity and the present case are similar insofar as both the assessees are into software development services. In that view of the matter, Wipro Technologies Services Ltd. has to be excluded from the list of comparables.

Without prejudice, it is submitted that before 20.01.2009, the Company was part of the Citi group and rendered services to various entities of the Citi group worldwide. With effect from 21.01.2009, the Company was acquired by Wipro Ltd. As part of the acquisition by Wipro, it was also agreed that the Company will be provided business of at least USD 500 million over a period of 6 years by the Citi group.

This pre-arrangement between Citi group and Wipro would make the subsequent rendition of services by the Company to the Citi group as deemed international transaction under section 92B(2) of the IT Act and accordingly, this income should be included in the RPT threshold, thereby making the Company as an unviable comparable.

In terms of Section 92B (2) of the Act, rendition of service by an enterprise (WTS) to a non-associated enterprise (Citi Group in the present case) as part of an understanding between the associated enterprise (Wipro) and the non-associated enterprise (Citi Group) is treated as a deemed international transaction for the purposes of Chapter X of the Act. Since in the present case it appears, from the limited annual report available and provided to us, that WTS has only rendered services to the Citi Group as per the MSA between Wipro and Citi Group, the entire revenues of WTS are on account of related party transaction. Accordingly, the comparable fails the filter of 25% RPT to sales applied by your goodself in the original proceedings and confirmed by the DRP.
In view of the aforesaid, WTS may be deleted from the list of comparables finally selected for the purpose of benchmarking of international transaction entered into by the Assessee with its associated enterprise.

Even otherwise this kind of commitment is not in the usual course of business and would qualify as an extraordinary event during the year since it is going to affect the profit margin of the company. Such extraordinary events in a year make the comparable unviable.

Without prejudice to the aforesaid, the TPO failed to provide the complete annual report of the said comparable inspite of the specific direction of the DRP and even in the rectification proceedings initiating by the Assessee under Section 154 of the Act. On that ground alone, the said company should be excluded from the list of comparables.”

The counsel for the Appellant has contended that during the proceedings before the TPO, the complete annual report of the said company was not furnished to the Appellant. Even when specific objection was raised before the DRP, the DRP instead of itself providing the annual report, directed the TPO to provide the annual report to the Appellant. However, despite the specific directions of the DRP and letter dated 05.12.2014 filed by the Appellant asking for the annual report of the said company, the TPO passed order dated 29.12.2014 without providing the annual report of WTS to the Appellant. It was further submitted that even when the Appellant filed an application for rectification under Section 154 of the Act before the TPO on 02.02.2015 and made specific requests for the annual reports of WTS before the TPO on 10.04.2015 and 15.04.2015, the TPO did not provide the complete annual report of the said comparable. It was, accordingly, submitted that since complete data of the said comparable was not furnished to the Appellant, it should be deleted from the list of comparables.

Without prejudice, the Counsel also submitted that in the case of Agnity India Technologies, which is in the same line of business, viz., software development services, a co-ordinate Bench of the Tribunal has deleted the said comparable on the ground of functional dissimilarity.

27. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that WTS is a good comparable.

28. We have considered the rival submissions and perused the material on record. The arguments of the ld. AR that only on account of super normal profit this comparable should be excluded is not tenable in the light of the Hon’ble jurisdictional High Court decision in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd in ITA 417/2014 judgment dated 27.04.2015. However, we must, at the outset, record certain facts which are undisputed. Firstly, WTS did not feature in the accept/reject matrix applied by the TPO. However, it was included in the final set of comparable. The TPO, at page 37 of his Order, has stated that Wipro Ltd. is WTS which appeared in the accept reject matrix. However, the TPO has failed to appreciate that Wipro Ltd. is not WTS, the latter being a subsidiary of the former. Secondly, before the DRP, the assessee raised the other objections as were raised before us i.e. this company is rendering different services, there is insufficient segmental information and it fails RPT filter. So, when the assessee asked for the complete annual report at the time of the original TP proceedings, or the proceedings pursuant to the DRP and also in the rectification proceedings under Section 154, the TPO failed to provide the complete annual report of the said comparable to the assessee. If the TPO wanted to use WTS as a comparable, the onus was on him to provide the complete annual report to the assessee. It is a settled law that onus is on the person who asserts the facts. In any case, we fail to see how without the complete annual report of WTS, the TPO or even the DRP came to the conclusion that the said company is a valid comparable and/or that it passed all filters applied by the TPO himself. From the Annual Report, we take note of the following :-

“As per the profit and loss account of FY 2009-10, 100% income is from 'Revenue' and no further break up is provided, as depicted in the extract of Page 5 below:

28.1 No revenue or segmental break up is available between software services and infrastructure support services and no information about the nature of business is available in the annual report. Further, the 'Balance Sheet Abstract and the Company's General Business Profile' section on Page 14 does not provide any information regarding the type of products/ services the company deals in as shown below:

(i) Item Code No (ITC Cod.) Product Description
(ii) Item Code No (ITC Code) Product Description
(iii) Item Code No (ITC Code) Product Description ”

28.2 In the light of the aforesaid facts emerging from few extracts of the annual report, we concur with the submissions advanced by Ld AR that in the absence of the Director’s Report and Notes to Account for this comparable are not available in public domain it would not be prudent to take this company as a comparable. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 for AY 2007-08 order dated 18.09.2015.

FOREIGN EXCHANGE GAIN/LOSS

29. The next issue relates to treatment of foreign exchange fluctuation gain/loss as operating item. During the course of hearing, the learned counsel submitted that the foreign exchange gain/loss cannot be excluded for the purpose of calculation of the margin and in support, he relied upon the Order dated 26.06.015 passed in ITA NO.6737/Del/2015 in the case of assessee’s group company viz., Fiserv India Pvt. Ltd.

30. Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under:

“We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : 'where profit or loss arises to an asssessee on account of appreciation or depreciation ITA Nos.4446 & 4447/Del/2007 in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost.” 16 We find that the aforesaid basis that foreign exchange gain/loss should be treated as non-operating item is based on the notification of CBDT issued on 18.9.2018 on safe harbour. However, such a contention has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: “4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration.”

31. To the same effect is the decision of the Co-ordinate Bench in Fiserv India Pvt. Ltd. – Order dated 26.06.015 passed in ITA No.6737/Del/2015

32. In light of the above, we direct the AO/TPO to treat the foreign exchange gain/loss as an operating item. As such, the ground raised by the assessee is allowed.

ADDITION OF TRANSFER PRICING ADJUSTMENT TO MAT

33. The final issue for consideration is challenge raised by the assessee to the action of the AO in adding back transfer pricing adjustment of Rs. 1,18,93,468/- to income assessed under Section 115JB (MAT).

34. In this regard, the learned counsel for the assessee submitted that the AO has added the transfer pricing adjustment of Rs. 1,18,93,468/- to the book profits of the Assessee under Section 115JB of the Act without appreciating that book profits of the company cannot be adjusted except as provided in Explanation 1 Section 115JB(2) of the Act and that transfer pricing adjustment is not one of the adjustments contemplated under that Explanation. He placed reliance upon the following decisions to contend that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act :-

i. Apollo Tyres: 255 ITR 273(SC)
ii. Malayalam Manorma: 300 ITR 251(SC),
iii. HCL Comnet Systems and Services Ltd., 305 ITR 409 (SC) and
iv. DCIT v. Bisleri Sales Ltd.: 151 TTJ 285 (Mum)(ITAT)

35. The Ld. Sr. DR on the other hand supported the order of the AO on the strength of the decision of the Special Bench of the Tribunal in the case of Rain Commodities v. DCIT: (2010) 40 SOT 265.

36. We have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB.

37. The case-law relied upon by the Ld. Sr. DR i.e. decision of the Special Bench in the case of the Tribunal in Rain Commodities (supra) does not also advance the case of the Revenue. In that case the Special Bench was considering whether the AO can alter the net profits declared by an assessee. The Special Bench has, following the decision the apex Court in Apollo Tyres and HCL Comnet (supra), inter alia, held that the AO cannot travel beyond the net profits declared by the assessee unless (a) it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or (b) the incorrect accounting policies, accounting standards have been adopted for preparing such accounts and the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.

38. In the present case there is no allegation is the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.

39. In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under Section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act.

40. In the result, the appeal of the assessee is allowed for statistical purposes.