PCIT Vs Steria India Pvt. Ltd. (Delhi High Court)
Transfer Pricing Appeal Dismissed as Issues Already Covered by Precedent; Forex Fluctuation Treated as Operating Income/Cost in Cost-Plus Transactions; High Brand Value and Intangibles Justify Exclusion of Transfer Pricing Comparables; Amalgamation and Extraordinary Events Make Companies Non-Comparable for TP; Software Product and R&D Companies Not Comparable to Service Providers; No Substantial Question of Law Where ITAT Follows Settled Transfer Pricing Law; Revenue Appeal Also Rejected Due to 1265-Day Delay in Re-Filing
The Delhi High Court examined an appeal filed by the Revenue challenging an order dated 17.11.2020 of the Income Tax Appellate Tribunal (ITAT), New Delhi, which had decided appeals relating to Assessment Years 2010–11 and 2011–12. The Revenue clarified that the present appeal primarily concerned Assessment Year 2010–11, where the ITAT had upheld the directions of the Dispute Resolution Panel.
The Revenue proposed multiple substantial questions of law, largely arising from transfer pricing adjustments. These questions related to (i) determination of the arm’s length price of international transactions, (ii) treatment of foreign exchange fluctuation as operating or non-operating income/cost, and (iii) exclusion of several companies as comparables on grounds such as functional dissimilarity, significant brand value, extraordinary events like amalgamation, ownership of intangibles, lack of segmental data, software product or R&D orientation, and related party transactions.
At the outset, counsel for the Revenue fairly conceded that all proposed questions of law, except one relating to foreign exchange fluctuation, were already covered against the Revenue and in favour of the assessee by binding judicial precedents. A detailed chart was placed on record demonstrating that the ITAT’s exclusion of various comparables had been upheld consistently by earlier decisions of the Delhi High Court and other courts for the same or comparable assessment years. These precedents had recognized that companies with significant brand value, ownership of intangibles, extraordinary events such as amalgamation during the relevant year, different functional profiles (such as medical transcription, software products, R&D or engineering services), absence of segmental data, or substantial related party transactions could not be treated as functionally comparable for transfer pricing analysis.
With respect to the remaining issue concerning treatment of foreign exchange fluctuation, the Court noted that this question was squarely covered by its earlier judgment. In that decision, the Court had held that foreign exchange gain or loss arising directly from international transactions could not be treated as non-operating in nature. Where such fluctuation was linked to trading items or cost-plus international transactions, it formed part of operating revenue or cost for transfer pricing purposes. The Court observed that even in the present case, the Transfer Pricing Officer had treated foreign exchange fluctuation as operating in nature. On parity of reasoning, no substantial question of law arose on this issue either.
The Court further recorded that there was a substantial delay of 1265 days in re-filing the appeal. Independently on this ground as well, the Court was not inclined to interfere with the order of the ITAT.
In view of the above, the Delhi High Court concluded that none of the proposed substantial questions of law survived for consideration. The issues raised by the Revenue were fully covered by existing precedents, and the remaining question regarding foreign exchange fluctuation was also settled. Additionally, the unexplained delay in re-filing weighed against the Revenue. Consequently, the appeal, along with pending applications, was dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
