Tribunal directs Transfer Pricing Officer to reconsider comparables & rectify ESOP expenses for appeal

The appeal was partly allowed for statistical purposes. The Tribunal directed the Transfer Pricing Officer/Appellate Officer to reconsider the inclusion of certain comparables following the guidelines laid down by the Delhi High Court, rectify the double counting of ESOP expenses, and treat foreign exchange fluctuation gain/loss as an operating item.

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Issues Involved:

1. Rejection of certain companies as comparables due to different financial year endings.
2. Inclusion of ESOP expenses twice in the operating cost base.
3. Treatment of foreign exchange fluctuation gain/loss as a non-operating item.

Issue-wise Detailed Analysis:

1. Rejection of Certain Companies as Comparables Due to Different Financial Year Endings:

The assessee argued that the rejection of certain comparables by the TPO on the ground that they follow a different financial year other than the financial year was erroneous. The assessee cited the case of Mckinsey Knowledge Centre India Pvt. Ltd. Vs CIT-II, where the Hon’ble Delhi High Court held that if a comparable is functionally the same as the tested party, it cannot be rejected merely because it has a different financial year ending. The Tribunal, considering this precedent, directed the TPO/AO to include the comparable if the results for the financial year could reasonably be extrapolated from the available data.

2. Inclusion of ESOP Expenses Twice in the Operating Cost Base:

The assessee contended that the TPO erroneously included an amount of Rs. 3,33,10,161/- pertaining to ESOPs twice in the operating cost base, leading to an inflated cost computation. The DRP had directed the TPO to correct this if there was a double impact, but the TPO did not comply. The Tribunal, after reviewing the submissions and documentary evidence, set aside this issue back to the TPO for fresh adjudication in accordance with the law, ensuring that the ESOP expenses are not doubly accounted for.

3. Treatment of Foreign Exchange Fluctuation Gain/Loss as a Non-Operating Item:

The assessee argued that foreign exchange fluctuation gain/loss should be considered as an operating item, citing the Hon’ble Delhi High Court's judgments in Pr. CIT, Delhi-I Vs Agilis Information Technologies International (I) Pvt. Ltd. and Pr. CIT, Delhi-1 Vs Ameriprise India Pvt. Ltd. The Tribunal noted that the Hon’ble Supreme Court in CIT Vs Woodward Governor India P. Ltd. held that loss on account of foreign exchange fluctuation is an item of expenditure under Section 37(1) of the Income-tax Act. Following these precedents, the Tribunal decided this issue in favor of the assessee, holding that foreign exchange fluctuation gain/loss should be treated as an operating item.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal directed the TPO/AO to reconsider the inclusion of certain comparables following the guidelines laid down by the Hon’ble Delhi High Court, to rectify the double counting of ESOP expenses, and to treat foreign exchange fluctuation gain/loss as an operating item.

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