Foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost

Brief of the case:

In the case of Ameriprise India Pvt. Ltd. Vs. ACIT Delhi Bench of ITAT held that the AO was not justified in considering forex loss as non-operating cost as against the assessee’s claim of operating cost. ITAT further held that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. Apart from this ITAT also give its finding on the inclusion/exclusion of certain companies in/from the list of comparables.

Facts of the case:

• Assessee is a wholly owned subsidiary of Ameriprise, US, which parent company is engaged in the business of insurance, annuities, asset management and brokerage.
• The primary object of Ameriprise US is to provide services towards financial planning and other areas like institutional asset management and advisory, pension fund management, the management and administration of certain plans.
• The assessee was incorporated in August, 2005 and started operations in October, 2005. It is engaged in providing Information Technology (IT) enabled services to Ameriprise US.
• The assessee reported two international transactions, including remuneration from the `Provision of IT-enabled back office services’ with transacted value of Rs.41,78,36,037/-.
• The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking the international transaction of provision of IT enabled back office support services.
• Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC) was computed by the assessee at 14.66%. Six companies were considered as comparable which have been listed in the Transfer Pricing Officer’s (TPO) order.
• It was shown that their arithmetic mean of operating profits compared favourably with assessee’s profit rate and, hence, the international transaction of `Provision of IT enabled back office services’ was at arm’s length price (ALP).
• On a reference made by the AO for determining the ALP of the international transactions, the TPO treated only three companies as comparable from the assessee’s list.
• AO added four new companies, thereby making a total of seven companies, considered comparable.
• On the basis of the above average operating profit margin of the comparable companies at 46.66%, computed on the basis of only the current year’s data, the TPO proposed transfer pricing adjustment, which has been assailed in the instant appeal.
• The TPO’s order enlists the functions performed by the assessee, which have been classified broadly into certain categories as follows:

(1) Financial services – which includes Accounting support, Mutual fund accounting, Sales and use tech support.

(2) Financial planning services – which refers to the assessee providing support in client data  entry for assistance in preparation of draft reports for customers.

(3) General counsel office services – , which includes E-discovery, Compliance, Profit and loss relations, Intellectual property claims and contracts drafting.

(4) Data analytics services – which involves scrambling and assembling of data into a more meaningful form to enable Ameriprise, US to review the performance of various products offered to its customers and other related activities.

(5) Vendor management services – which mean performing data processing services in respect of call centres and back office operations of certain companies, outsourced by Ameriprise US.

(6) Procurement services- Under this category, the assessee conducts basic analytics for better understanding of the `spend’ and determines how to optimize such spend across commodities.

(7) Human resources shared services – under which the assessee helps manage some human resources processes for the US employees including processing payroll, calculating benefits, managing leave of absence, etc.

• A narration of the above nature of services depicts that the conceptualization of the services is primarily done by Ameriprise US which collects data and sends the same in raw form to the assessee or the other relevant data is procured by the assessee directly from the sources referred by the Ameriprise US.
• The assessee compiles such raw data in desired format/sequence and undertakes processes, such as, merging of data, sequencing, etc.
• This is an in-house function performed by the assessee for further actions to be taken by Ameriprise US.
• Clause 3 of the Agreement discusses the nature of services to be provided by the assessee to Ameriprise US as AIPL shall, at the request of Ameriprise, USA, supply to Ameriprise, USA or its Designated Offices, the specified products and services.
• A perusal of the clause 3 of the Agreement between the assessee and Ameriprise, US reveals that the assessee is to collect and then process the data received/sourced from Ameriprise US and thereafter send the reports to Ameriprise US in the desired form.
• In other words, the assessee is involved in providing back office support services to Ameriprise US without any direct involvement in the conduct of business of Ameriprise US.
  

Issue of challenge to the inclusion/exclusion of certain companies in/from the list of comparables

• With the background of the assessee’s nature of work done for its AE, which is primarily in the nature of rendering IT enabled services, which position has also been admitted by the TPO as well, we proceed to determine the comparability or otherwise of the companies challenged before us.

(1) Cosmic Global Limited (Seg.):

• Initially this company is included as comparable by assessee but later on he argued that company has low turnover, less than One Crore, and hence cannot be included in the list of comparables.
• AO treated the company as comparable and no relief was granted by TPO.
• ITAT held that that Cosmic Global Ltd. (Seg.) cannot be excluded from the list of comparables in the light of judgment in Hon’ble jurisdictional High Court in Chrys Capital Investment Advisors (I) Pvt. Ltd. vs. DCIT, vide its recent judgment dated 27.4.2015 has held that high profit or high turnover cannot be a criteria to exclude an otherwise comparable company.
• ITAT also found that the functional comparability of the Accounts BPO segment of Cosmic Global has been accepted by the assessee.

(2) CG-VAK Software and Exports Ltd. (Seg.):

• The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated it on the ground that it was providing software services and ITES and its turnover from ITES was only 0.86 crore, which was less than the requisite filter of turnover.
• TPO has accepted the functional comparability of this company on segmental level.
• Observation in the case of the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) applies with full force in the converse manner as well to a low turnover/low profit company. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables.
• Hence, ITAT direct the inclusion of the relevant segment of this company in the list of comparables.

(3) Accentia Technologies Ltd.

• The TPO considered this company as comparable.
• ITAT found that aforesaid company is the pooling of income from software products in its overall profitability, which cannot be separated with precision, thereby rendering it incomparable.

(4) e- Clerx Services Ltd.

• TPO treated this company as comparable by ignoring the assessee’s objections about the functional dissimilarity.
• ITAT found that it is a Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to global clients.
• ITAT further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles and hence cannot be considered as comparable.

(5) R. Systems International Ltd. (Seg.)

• The assessee included this company in its list of comparables.
• TPO eliminated the same on the ground that it was following different year ending, namely, 31st December and, hence, was not comparable.
• Assessee contended that the above company was following calendar year for maintaining its accounts in contrast to the assessee following financial year ending 31st March.
• ITAT held that even though its quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating cost etc. for the relevant financial year are not directly available without any apportionment or truncation, then this company should not be considered as comparable.

Treatment of foreign exchange gain/loss as an item of nonoperating nature

Contention of the assessee:

Assessee contended that the foreign exchange loss relates to its transactions from operations by which the revenue has been earned and offered for taxation.

Contention of the revneue:

Foreign exchange is in relation to the trading items emanating from the international transactions. When the foreign exchange loss directly results from the trading items, hence it is fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating.

Held by ITAT:

• 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.
• Further special bench observed that exchange rate gain or loss cannot have a different character from the transaction to which it pertains.
• 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.
• In the light of above judgements ITAT held that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables.
• Hence, the AO was not justified in considering forex loss as non-operating cost as against the assessee’s claim of operating cost.
• With the above remarks, ITAT set aside the impugned order and send the matter back to the file of TPO/AO for determining the ALP of the international transaction afresh.

Revenue’s appeal:

Facts:

• The assessee had shown certain receivables from its AE. On examination of the assessee’s balance sheet, it was noticed by the TPO that payments against the invoices raised by the assessee were not received within the stipulated time as provided in the Agreement.
• The TPO has calculated TP adjustment on account of interest on outstanding debts beyond a period of 30 days by noting the number of days after which the relevant invoice was realized.

Contention of the assessee:

• Receivables was not an international transaction which warranted benchmarking.
• Assessee relied upon the decision passed in Kusum Healthcare Pvt. Ltd. vs. ACIT (ITA No.6814/Del/2014) in which it has been held that no additional imputation of interest on the outstanding receivables is warranted if the pricing/profitability is more than the working capital adjusted margin of the comparables.

Contention of the revenue:

• Revenue relied upon decision passed by the Tribunal in the case of Techbooks International Pvt. Ltd. (supra), in which the transfer pricing adjustment on account of the delayed realization of invoices from AEs has been upheld.
• The order in the case of Kusum Healthcare Pvt. Ltd. (supra), has been passed without considering the amendment to section 92B carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later order in Techbooks International Pvt. Ltd. (supra)

Held by DRP:

• Interest at the rate of 15.77% was chargeable at arm’s length level in respect of delayed receipt of invoice values.
• Considering the period of delay beyond 30 days as chargeable to interest, he proposed TP adjustment of Rs.5,98,083/-.
• Since direction for allowing of working capital adjustment was given by it, the issue of any interest element pertaining to the receivables would be subsumed in the same.
• No separate transfer pricing adjustment was called for.

Held by ITAT:

• It would be apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression ‘international transaction’ in an inclusive manner.
• It was held on going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, ‘any other debt arising during the course of business’ has also been expressly recognized as an international transaction.
• If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP.
• The contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force.
• The Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002.
• In view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, ITAT hold that the charging of interest on receivables is not sustainable on the extant facts.
• The appeal of the assessee is partly allowed for statistical purposes and that of the Revenue is dismissed.