Tribunal excludes companies from comparables, adjusts for risk profile differences, and addresses forex gains/losses

The Tribunal allowed the appeal of the assessee by directing the exclusion of Universal Print Systems Limited and Excel Infoways Limited from the list of comparables. It also instructed treating foreign exchange gain/loss as part of operating income and allowing risk adjustment for differences in functional and risk profiles between comparable companies and the assessee. Other grounds of appeal became academic following the resolution of primary issues.

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Issues Involved:
1. Inappropriate acceptance of certain non-comparable companies as comparable to the assessee.
2. Consideration of foreign exchange fluctuations as non-operating items.
3. Comparison of full-fledged risk-bearing entities with the assessee’s captive operations without making any risk adjustment.

Issue-wise Detailed Analysis:

1. Inappropriate acceptance of certain non-comparable companies as comparable to the assessee:

The assessee contested the inclusion of Universal Print Systems Limited and Excel Infoways Limited as comparable companies. The Tribunal noted that Universal Print Systems Limited operates in the print industry, which is functionally different from the ITes-BPO services provided by the assessee. The Tribunal referenced the decision in XL Health Corporation India Pvt. Ltd. Vs. ACIT, which excluded Universal Print Systems Limited due to its involvement in printing and publishing activities, making it non-comparable to ITes-BPO services. Consequently, the Tribunal directed the exclusion of Universal Print Systems Limited from the list of comparables.

Regarding Excel Infoways Limited, the Tribunal observed that the company exhibited fluctuating profit margins and had shut down its BPO operations during the relevant financial year. The Tribunal cited the decision in Emerson Climate Technologies (India) Pvt. Ltd. Vs. DCIT, which excluded Excel Infoways Limited due to its fluctuating margins and diminishing revenue trend. The Tribunal also referenced the decision in Baxter India Pvt. Ltd. Vs. ACIT, which excluded Excel Infoways Limited for failing the diminishing revenue filter and having super normal profits. Thus, the Tribunal directed the exclusion of Excel Infoways Limited from the list of comparables.

2. Consideration of foreign exchange fluctuations as non-operating items:

The assessee argued that foreign exchange gain/loss should be considered part of operating income as it arises from normal business operations. The Tribunal noted that the Safe Harbour Rules, which treat foreign exchange fluctuations as non-operating, were introduced prospectively from the assessment year 2014-15 and do not apply to the assessment year 2012-13. The Tribunal referenced the decision in Imerys Newquest (India) Pvt. Ltd. Vs. DCIT, which held that foreign exchange gain/loss is part of operating income. Consequently, the Tribunal directed the TPO/Assessing Officer to treat foreign exchange gain/loss as part of the operating income of the assessee.

3. Comparison of full-fledged risk-bearing entities with the assessee’s captive operations without making any risk adjustment:

The assessee contended that it operates under limited risk compared to the entrepreneurial risk borne by comparable companies and sought risk adjustment. The Tribunal referenced the decision in Starnet Networks (India) Pvt. Ltd. Vs. ACIT, which allowed risk adjustment for differences between the functional and risk profiles of comparable companies and the assessee. The Tribunal also cited the decision in Applied Micro Circuits India Pvt. Ltd. Vs. DCIT, which directed the allowance of risk adjustment and re-computation of margins of comparables. Consequently, the Tribunal directed the Assessing Officer to allow risk adjustment and re-compute the margins of comparables.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the exclusion of Universal Print Systems Limited and Excel Infoways Limited from the list of comparables, treating foreign exchange gain/loss as part of operating income, and allowing risk adjustment for differences in the functional and risk profiles of comparable companies and the assessee. The remaining grounds of appeal became academic in nature after the adjudication of the primary issues.

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