Persistent Loss Should Be Continuous Over 3 Years: ITAT Delhi Orders Rework Of TP Addition For Keysight

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed the taxpayer's appeal, holding that companies cannot be excluded as comparables merely for incurring losses in two out of three years and that foreign exchange fluctuations arising from business transactions must be treated as operating in nature.

A coram comprising Judicial Member Yogesh Kumar U.S. and Accountant Member Manish Agarwal held that “persistent loss filter can be applied only if there is loss in three successive assessment years and if there is profit in anyone of the three successive financial years selected, then the company cannot be excluded,” while dealing with the exclusion of certain comparables by the Transfer Pricing Officer (TPO).

The taxpayer, Keysight Technologies International India Pvt. Ltd., a wholly owned subsidiary engaged in providing software development services and IT-enabled services to its Associated Enterprises (AEs), had filed its return declaring income of ₹35.83 crore.

The case was referred to the TPO, who proposed an adjustment of Rs 4.13 crore, later reduced to Rs 2.67 crore pursuant to directions of the Dispute Resolution Panel (DRP). The Assessing Officer consequently passed the final order assessing income at Rs 49.75 crore. Aggrieved, the taxpayer preferred an appeal before the ITAT challenging, inter alia, the transfer pricing adjustments, selection of comparables, treatment of foreign exchange gains, and denial of certain tax credits.

On the issue of the exclusion of certain companies such as Mindtree Ltd. and Nihilent Ltd., the Tribunal ruled in favour of the taxpayer, observing that these entities were functionally dissimilar, had significantly higher turnover, and lacked segmental data for software development services. Accordingly, they were directed to be excluded from the comparable set.

On the other hand, the Tribunal rejected the exclusion of certain companies chosen by the taxpayer, holding that entities which had incurred losses in two out of three years could not be excluded if they had earned profits in at least one of those years. It directed the inclusion of such companies in the final set of comparables.

Dealing with the treatment of foreign exchange fluctuations, the tribunal observed, "It is observed that the TPO has treated the foreign exchange fluctuation gain as non operating item but fact remained that foreign exchange fluctuations gains / losses are suffered at the time of realization from the debtors out of the sales / services made to them and therefore, they are having direct relation with the main business operation and cannot be treated as the non-operating item."

The tribunal further held that foreign exchange gains arising from transactions directly linked to the taxpayer's export of services must be treated as operating in nature while computing the Profit Level Indicator (PLI).

On the issue of risk adjustment, the tribunal restored the matter to the Assessing Officer/TPO for fresh consideration, directing them to examine the taxpayer's claim in accordance with law.

The tribunal also directed the Assessing Officer to grant credit for self-assessment tax and tax collected at source after due verification. Other grounds relating to interest were treated as consequential, while the challenge to penalty initiation was dismissed as premature.

Resultantly, the appeal was partly allowed in favour of the taxpayer

For Appellant:  Advocates Vishal Kalra, and Ms. Kashish Gupta, CA

For Respondent: S.K. Jadhav, CIT-DR