DIGITAL GROUP INFOTECH PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,, PUNE

आदेश / ORDER PER ANIL CHATURVEDI, AM :

This appeal filed by the assessee for A.Y. 2012-13 is 1. emanating out of the order dt.25.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the Act.

2.1 Assessee is a company stated to be engaged in the business of Offshore Development of Software. Assessee filed its return of

income for A.Y. 2012-13 on 29.11.2012 declaring total income of

Rs.3,14,57,063/-. It was noticed that assessee had entered into

International Transactions with its Associated Enterprises (A.Es)

amounting to Rs.46,90,15,187/-. Accordingly, reference u/s

92CA(1) of the Act was made to the Transfer Pricing Officer (TPO)

for computation of Arms Length Price (ALP) in relation to the

International Transactions. Thereafter, the TPO vide order

dt.29.01.2016 passed u/s 92CA(3) of the Act did not accept the

bench marking of the international transactions done by the

assessee with its Associated Enterprises and made an upward

adjustment of Rs.5,47,53,550/-. The assessee was therefore vide

show cause notice dt.08.06.2013 asked to show cause as to why

the income not be enhanced by the adjustment as suggested by

TPO. Assessee inter-alia submitted that assessee did not agree

with the proposed addition for the reasons submitted by it before

TPO. AO thereafter passed draft assessment order u/s 143 r.w.s

144C(1) of the Act vide order dt.18.03.2016 and determined the

total income at Rs.8,69,19,540/-. Aggrieved with the draft

assessment order passed by AO, assessee carried the matter

before the Dispute Resolution Panel (DRP), who vide order

dt.17.11.2016 gave certain directions. Pursuant to the directions

of the DRP, AO passed order u/s 143(3) r.w.s. 144C(13) of the Act

vide order dt.25.01.2017 and determined the total income at

Rs.6,40,56,250/-. Aggrieved by the order of TPO, assessee is now

in appeal before us and has raised the following grounds :

“1. General Grounds

The Learned DRP-3 Mumbai (hereinafter DRP) erred in law and facts in directing and the learned DCIT Circle 1 (2) Pune (hereinafter' AO') erred in law and on facts in making the additions of Rs.3,22,90,259/- to the taxable income of the appellant company.

2.1 The Learned DRP has erred in law and on facts in confirming and the learned AO/TPO erred in making a reference u/s.92CA(1) to the TPO for deciding Arm's Length Price of the international transactions of the appellant, without reaching any opinion about situations specified in section 92C(3) of the ITA, 1961. The learned AO ought to have granted a specific hearing to the appellant before making a reference to the learned TPO in this regard.

2.2 The Learned DRP has erred in law and on facts in confirming and the learned AO/TPO erred in holding that Arm's Length price ('ALP') of the Software Development services provided by the appellant to its AE party should be worked out by considering OP/TC margin of 18.54%, leading to an addition of Rs.3,18,90,259/-.

2.3 The Learned DRP and learned AO/TPO erred in treating Foreign Exchange gain of Rs 1,89,07,522 as non- operative income, not eligible for computation of profit level indicator (PLI) of OP/TC of the appellant company and thus reducing the appellant's margin to 10.20% instead of 15.93% .

2.4 The Learned DRP and learned AO/TPO erred in considering only single year data of the external comparables instead of multiple year data used by the appellant.

2.5 The Learned DRP and learned AO/TPO erred in law and on facts in keeping / selecting following comparable in the final array of comparables, for one or the other reasons –

- Cybermate Infotek Ltd - Infobeans Systems Pvt. Ltd. - eZest Solutions Limited - Cybercom Datamatics Information Solutions Ltd. - Thirdware Solutions Ltd.

2.6 The Learned DRP and learned AO/TPO erred in law and on facts in rejecting following comparable, for functional differences and for other reasons-

- Datamatics Global Services Ltd. - Firstobject Technologies Ltd. - Objectone Information Systems Ltd.

- R Systems International Ltd. - Technosoft Engineering Projects Ltd.

2.7 The Learned DRP and learned AO/TPO erred in law and on facts in not granting adjustment of around Rs 3.50 Crores in respect of excessive benching cost incurred by the appellant. 2.8 The Learned DRP and learned AO/TPO erred in law and on facts in not accepting alternative benchmarking done by changing the tested party. 2.9 The learned DRP erred in law and on facts in sustaining and the learned AO/TPO erred in proposing enhancement of ALP of international transactions of the Appellant without appreciating that the overall addition of Rs. 3,18,90,259 was more than the off-shore segmental profits of the AE party. 3. The Learned DRP and learned AO/TPO erred in law and on facts in making/sustaining ad-hoc disallowance of Rs.4,00,000 being 20% of Travelling & Hotel Expenses of Directors debited to P & L account amounting to Rs.19,98,034.”

assessee has raised various grounds but if ground No.2.3 raised

by the assessee is decided in favour of the assessee then the

transaction of the assessee would be at ALP and no adjustment

would be required and therefore the other grounds raised by the

assessee would be rendered academic. Ld.D.R. did not object to

the aforesaid submissions of Ld.A.R. In view of the aforesaid

submission of Ld.A.R., we proceed to first dispose of ground

No.2.3.

that assessee had earned foreign exchange gains of

Rs.1,89,07,522/-. He noticed that assessee had considered the

aforesaid gains as Operational Income and worked out the Profit

Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC)

at 15.93%. TPO was of the view that the foreign exchange income

cannot be considered as operational income but has to be

considered as non-operational income. Before TPO it was

submitted that the foreign exchange gains derived by the assessee

was on account of trade sales made during the year and it was

directly related to the main business operation of the assessee and

the same should therefore be included while computing the

operating margin of the assessee. The submission of the assessee

was not found acceptable to the TPO. TPO was of the view that

considering the definition given in Rule 10TA of the Income Tax

Rules, the foreign exchange gains cannot be considered to be

operational income. He accordingly considered the foreign

exchange gains as non-operational income and worked out the PLI

of Operating Profit to Operating Cost (OP/OC) at 10.20% and

enhanced the income. Aggrieved by the order of TPO, assessee

carried the matter before DRP, who upheld the order of AO by

holding as under :

“6.2 In this regard, we are of the view that foreign exchange gain/loss arises on account of fluctuation in the Exchange Rate of the Foreign Currency and therefore it has no relation to business operations of the assessee. Such income or expenditure which has no connection with the normal business operations of the company is required to be treated as non-operating income/expenditure and should be excluded from the computation of operating profit while determining the operating margins. The support for this view is taken from the definition of the expression “Operating Revenue” and “Operating Expense” furnished in Rule 10TA of the I.T. Rules forming part of the Safe Harbour Rules”. Aggrieved by the order of DRP, assessee is now in appeal before

us.

TPO and DRP and further submitted that the foreign exchange

gains derived by the assessee on trade sales made during the year

directly relates to the main business operations of the assessee

and the same should be included while computing the operating

margin of the assessee. He further submitted that the Hon’ble

Delhi High Court in the case of Pr.CIT Vs. BC Management

Services Pvt. Ltd., in ITA No.1064 of 2017 vide order

dt.28.11.2017 has held that foreign exchange gains earned by the

assessee emanate out of international transactions. He further

submitted that the TPO as well as DRP had relied on Rule 10TA of

the Income Tax Rules forming part of “Safe Harbour Rules” to

conclude that the foreign exchange gains are not operating profits.

He submitted that Rule 10TA to 10TG which pertains to Safe

Harbour Rules for International Transactions were inserted by IT

(Sixteenth Amendment) Rules 2013 w.e.f. 18.09.2013 and thus

the “Safe Harbour Rules” came into force in 2013 and therefore

not applicable to the year under consideration being A.Y. 2012-13.

In support of his contention that Rule 10TA are not applicable to

A.Y. 2012-13, he relied on the aforesaid decision rendered by the

Hon’ble Delhi High Court in the case of BC Management Services

Pvt. Ltd., (supra). He therefore submitted that the TPO and DRP

erred in not considering the foreign exchange gain as operational

income. Ld.D.R. on the other hand, supported the order of TPO

and DRP.

material on record. The issue in the present ground is non-

consideration of the foreign exchange gains as operational income

for the purpose of computing the PLI. Before us, it is assessee’s

contention that the foreign exchange gains have been earned in

the normal course of business and have been derived on account

of trade sales made during the year and directly relates to the

main business operation of the assessee. The aforesaid

submission of the assessee has not been controverted by the

Revenue. Further, the Revenue has relied upon Rule 10TA of the

I.T. Rules, 1962 for coming to the conclusion that the foreign

exchange gains cannot be considered as non-operational income.

We find that Hon’ble Delhi High Court in the case of BC

Management Services (P) Ltd., (supra), has held that the “Safe

Harbour Rules” which were notified by the Revenue authorities

came into force in 2013 and therefore not applicable to A.Y. 2011-

decision in its support. We therefore respectfully following the

aforesaid decision of Hon’ble Delhi High Court in the case of BC

Management Services (P) Ltd., (supra), are of the view that the

TPO and DRP has erred in considering the foreign exchange gain

to be as non-operational income by relying solely on Rule 10TA.

We therefore set aside the order of TPO and direct that the foreign

exchange gains to be considered as operational income for the

purpose of computation of PLI. Thus, the ground No.2.3 of the

assessee is allowed.

is decided in assessee’s favour, the other grounds would be

rendered academic. In view of the aforesaid submission and in

view of our decision on ground No.2.3 wherein we have decided

the issue in faovur of assessee, the other grounds raised by the assessee are held to be of academic and therefore not adjudicated.

Order pronounced on 28th day of February, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 28th February, 2018. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A) – 13, Pune. 4. CIT(IT/TP), Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” / DR, 5 ITAT, “A” Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER // True Copy // // True Copy //

व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.