Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 17.11.2020 passed by the Income Tax Appellate Tribunal, New Delhi, for Assessment Years 2010-11 and 2011-12. The appeal before the High Court primarily concerned Assessment Year 2010-11.

The Tribunal had upheld the Dispute Resolution Panel’s directions relating to transfer pricing adjustments in the ITES and software services segments, including treatment of foreign exchange gain/loss and exclusion of certain comparables such as Infosys BPO Ltd., TCS E-Serve entities, Accentia Technologies Ltd., Infinite Data Systems Ltd., Infosys Technologies Ltd., Wipro Technologies Ltd. and Persistent Systems Ltd. The Revenue proposed multiple substantial questions of law challenging these exclusions and the treatment of foreign exchange fluctuation.

Issues Involved

Whether foreign exchange gain/loss arising from international transactions should be treated as operating revenue/cost for transfer pricing purposes, whether the Tribunal erred in excluding brand-driven and functionally dissimilar comparables, whether amalgamation constitutes an extraordinary event warranting exclusion of a comparable, and whether the appeal raised any substantial question of law under Section 260A.

Appellant’s Arguments

The Revenue contended that arm’s length price must remain uninfluenced by post-transaction events such as foreign exchange fluctuation and that the TPO had consistently treated foreign exchange gain/loss as non-operating for both the tested party and comparables. It was further argued that the Tribunal erred in excluding large companies like Infosys BPO and TCS E-Serve entities merely on account of brand value, and in excluding companies such as Accentia Technologies and Persistent Systems despite their functions allegedly being comparable.

Respondent’s Arguments

The assessee submitted that all issues raised by the Revenue, except the foreign exchange fluctuation issue, were already covered by binding precedents of the Delhi High Court in the assessee’s own cases and other decisions for the same assessment year. It was argued that companies having significant brand value, extraordinary events like amalgamation, ownership of intangibles, lack of segmental data, or materially different functional profiles were rightly excluded. On foreign exchange fluctuation, reliance was placed on the Delhi High Court judgment in PCIT Delhi-I vs. Ameriprise India Pvt. Ltd., holding such gain/loss to be operating in nature.

Court Order / Findings

The Delhi High Court recorded the Revenue’s fair concession that all substantial questions of law proposed, except the one relating to foreign exchange fluctuation, were squarely covered against the Revenue by earlier judgments of the Court. The Court noted that exclusion of comparables such as Infosys BPO Ltd., TCS E-Serve entities, Accentia Technologies Ltd., Infinite Data Systems Ltd., Infosys Technologies Ltd., Wipro Technologies Ltd. and Persistent Systems Ltd. had consistently been upheld on grounds of significant brand value, extraordinary events, functional dissimilarity, ownership of intangibles, lack of segmental data, or different risk profiles. These were pure findings of fact based on FAR analysis and did not give rise to any substantial question of law.

With respect to foreign exchange fluctuation, the Court relied on its earlier judgment in PCIT Delhi-I vs. Ameriprise India Pvt. Ltd., holding that foreign exchange gain/loss arising from international transactions is directly linked to operating activities and must be treated as operating revenue/cost. Applying parity of reasoning, the Court held that no substantial question of law arose on this issue either.

The Court also noted that there was an unexplained delay of 1265 days in re-filing the appeal.

Important Clarification

The Court clarified that determination of comparability, including exclusion of entities with brand value, extraordinary events, or different functional profiles, is a factual exercise. It further clarified that foreign exchange gain/loss arising from international transactions forms part of operating revenue/cost for transfer pricing purposes where it directly emanates from such transactions.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court held that no substantial question of law arose on any of the issues raised, upheld the ITAT’s order for Assessment Year 2010-11, and also declined to interfere in view of the unexplained delay in re-filing the appeal.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769504008_THEPR.COMMISSIONEROFINCOMETAX7VsSTERIAINDIAPVT.LTD..pdf

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