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Principal Commissioner of Income-tax v. B.C. Management Services (P.) Ltd.
Summary of the Court's Opinion
Factual and Procedural Background
The assessee company was incorporated on 12.05.2010 and provides IT-enabled services (application and infrastructure development and testing, system and performance operations management and support) to its associated enterprises. The assessee filed its Transfer Pricing Report with its income tax returns on 28.11.2011 declaring total income of Rs. 2,98,06,000/-. The matter was referred to the Transfer Pricing Officer (TPO), who made adjustments totaling Rs. 2,89,52,326/-. The assessee objected to the Dispute Resolution Panel (DRP), which granted partial relief directing deletion of one comparable (Accentia). The Assessing Officer (AO) completed assessment under Section 143(3). The assessee appealed to the Income Tax Appellate Tribunal (ITAT). The ITAT allowed the assessee's appeals for AY 2011-12 by directing exclusion of four comparables (e-Clerx Pvt. Ltd., ICRA Techno Analytics Ltd., TCS E-Serve Ltd., and Accentia Technologies Pvt. Ltd.) and deleting additions for foreign exchange gains and notional interest. The Revenue appealed to this Court.
Legal Issues Presented
- 'Whether the exclusion of four comparables i.e. e-Clerx Pvt. Ltd., M/s ICRA Techno Analytics Ltd., M/s TCS E- Serve Ltd. and M/s Accentia Technologies Pvt. Ltd., are sustainable and not erroneous?'
- 'Whether the findings of the ITAT with respect to foreign exchange gain and the manner of its treatment as part of Operating Income for ALP determination, is correct and is justified?'
- 'Whether the exclusion of the Transfer Pricing adjustment made by the TPO, added notional interest on delay in receipt of payment of Associated Enterprises (AE) was justified?'
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Pr. CIT v. Cashedge India (P.) Ltd. [IT Appeal No. 279 of 2016, dated 4-5-2016] | Held that Safe Harbour Rules notified in 2013 cannot be applied to earlier assessment years; issues regarding foreign exchange and related treatment are not res integra for the Court. | The Court relied on this decision to conclude that Safe Harbour Rules (2013) could not govern AY 2011-12 and therefore no question of law arises on the foreign exchange treatment for that year. |
| Pr. CIT v. Ameriprise India (P.) Ltd. [IT Appeal No. 206 of 2016, dated 23-3-2016] | Held that foreign exchange gains which relate to trading items and emanate from international transactions (direct value derived therefrom) cannot be treated as Non-Operating losses and gains. | The Court cited this authority to support the view that foreign exchange gains related to international transactions should be treated as operating income for ALP determination and thus the ITAT's deletion of forex additions was justified. |
| Bechtel India (P.) Ltd. (supra) | Held that notional income on account of delayed payments cannot be treated as part of income and made the subject of adjustments. | The Court applied this principle to conclude that the notional interest/addition made by the TPO/AO for delayed receipt of payments was not a valid adjustment and therefore no question of law arises on that point. |
Court's Reasoning and Analysis
The Court divided its reasoning between (A) the issues concerning foreign exchange gains and notional interest, and (B) the exclusion of the four comparables.
A. Foreign Exchange and Notional Interest:
- The Court observed that the questions on foreign exchange treatment and notional interest were no longer res integra in light of the decision in Pr. CIT v. Cashedge India (P.) Ltd. and related authorities.
- Relying on Pr. CIT v. Ameriprise India (P.) Ltd., the Court noted the principle that foreign exchange gains arising from international trading transactions directly connected to the transactions cannot be treated as non-operating gains.
- The Court also observed that Safe Harbour Rules were notified in 2013 and hence could not govern AY 2011-12; accordingly the Revenue's reliance on those rules was rejected.
- With regard to notional interest, the Court followed the reasoning in Bechtel India (P.) Ltd. (supra) that notional income attributable to delayed payments should not be added to income as an adjustment.
- On these bases the Court held that no question of law arises regarding the ITAT's deletions of forex additions and notional interest additions.
B. Exclusion of the Four Comparables:
- For e-Clerx: The ITAT excluded it because (i) segmental data was unavailable, and (ii) it was functionally different — providing high-end/BPO services and financial services (consultancy, business solutions, testing) and other services such as web content management and analytics. The Court treated these as findings of fact based on record and refused interference.
- For ICRA Techno Analytics Ltd.: The ITAT excluded it on the basis that it was engaged in processing, software development and consultancy, engineering/web development services; reasons were functional dissimilarity and absence of segmental data. The Court found these findings reasonable and record-based.
- For TCS E-Serve: Although functionally close, the ITAT excluded it because of a close connection with Tata Consultancy Services Ltd., whose high brand value positively impacted TCS E-Serve's profitability — a factor distinguishing it from the assessee. The Court found this inference reasonable and upheld exclusion.
- For Accentia Technologies Pvt. Ltd.: The DRP had directed deletion; ITAT noted unavailability of segmental data and functional differences (Accentia engaged in KPO services in the healthcare sector). The Court accepted these factual findings and upheld exclusion.
- Overall, the Court treated the ITAT's exclusions as findings of fact grounded in record (functional dissimilarity, absence of segmental data, and brand/affiliation effects) and concluded they could not be interfered with.
Holding and Implications
APPEALS DISMISSED
Holding: The Court dismissed the Revenue's appeals and upheld the ITAT's exclusions of the four comparables and deletions of additions for foreign exchange gains and notional interest.
Implications: The direct effect is that the ITAT's order for AY 2011-12 stands — the four comparables were properly excluded on the recorded factual bases (functional dissimilarity, lack of segmental data, and brand/affiliation effects), and the additions for foreign exchange gains and notional interest were correctly deleted. The Court found that no substantial question of law arises for consideration in the present appeals.
ORDER
S. Ravindra Bhat, J. - The Revenue is aggrieved by the order of the ITAT which in AY 2011-12, accepted the assessee's appeals. The questions of law urged are as follows:—
2. The Assessee company was incorporated on 12.05.2010, which provides IT enabled services i.e. Application and infrastructure development and testing, system and performance operations management and support etc. to its associated enterprises.
3. The assessee was required to file Transfer Pricing Report along with its income tax returns on 28.11.2011 declaring the total income of Rs. 2,98,06,000/-.
4. The matter was referred to Transfer Pricing Officer (TPO) who made certain adjustments - to the tune of Rs. 2,89,52,326/- after taking into account the margins earned by the comparable industry/assessee, the detail and data of which was available. The assessee preferred its objections to the Dispute Resolutions Panel (DRP); which granted partial relief in the sense of direction to delete the comparable i.e. Accentia was made. The AO then completed the assessment under Section 143(3). The Assessee preferred appeal to the ITAT.
5. The ITAT granted relief with respect to the assessee's appeals by directing the exclusion of all four comparables and rejected the Revenue's appeals. Likewise, the additions made by the AO on the ground of foreign exchange gains, as well as additions of notional interest; were deleted.
6. This Court notes that so far as the second and third questions i.e. foreign exchange and notional interest are concerned, they are no longer res integra in terms of the order made by the DB of this Court in Pr. CIT v. Cashedge India (P.) Ltd. [IT Appeal No. 279 of 2016, dated 4-5-2016].
7.Pr. CIT v. Ameriprise India (P.) Ltd. [IT Appeal No. 206 of 2016, dated 23-3-2016], this Court had held that foreign exchange gains earned by the assessee which is in relation to trading items and emanating from international transactions, direct value derived from it cannot be treated as Non- Operating losses and gains.
8. This Court notices that Revenue seeks to rely on the Safe Harbour Rules which were notified by the Revenue authority and came into force in 2013. In these circumstances, given that the present assessment period covers AY 2011-12, the treatment cannot be in accordance with those rules as held in Cashedge India (P.) Ltd., (supra), decided on 04.05.2016. Consequently, no question of law arises.
9. With respect to the treatment of notional interest by the TPO/AO, the Court is of the opinion that no question of law arises. In an identical situation, in Bechtel India (P.) Ltd. (supra), the Court had held that such notional income on account of delayed payment made by the AO cannot be treated as part of the income and made the subject matter of the adjustments. The question no. 2 and 3 therefore does not arise for consideration.
10. So far as question no. 1 with respect to exclusion of four comparables is concerned, we notice that E-clerx was excluded on two grounds i.e. no segmental data was available, and it was functionally different as it was providing high end/BPO services.
11. This Court further notes that E-clerx is to provide financial services such as consultancy business solution and testing.
12. The Assessee provides IT abled services in infrastructure development and testing, system and performance operations management and support etc. The ITAT excluded E-clerx as comparable after noticing that it provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics, etc. This functional dissimilarity, and absence of segmental data led to its exclusion as a comparable. Those are findings of facts based upon record. Consequently, exclusion of E-Clerx was in order and cannot be interfered with.
13. The exclusion of second comparable ICRA Techno Analytics Ltd. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dis-similarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector.
14. In view of the above findings, this Court is of the opinion that no substantial question of law arises. The appeals are dismissed.
POOJA
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