Tribunal Rules on FOREX, KPO Comparables, and Computer Depreciation; Stay Application Moot for A.Y. 2012-13.

The ITAT allowed the appeal for A.Y. 2012-13 and partly allowed the appeal for A.Y. 2013-14. The Tribunal directed the TPO to include FOREX Fluctuation as operating income and excluded KPO service providers from comparables. Interest under section 234C was to be charged on returned income, and the disallowed computer depreciation was upheld. The Stay Application for A.Y. 2012-13 became moot.

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Issues Involved:
1. Re-computation of operating margin by the Transfer Pricing Officer (TPO).
2. Exclusion of FOREX Fluctuation, Domestic Revenue, and Prior Period Expenses from the operating margin.
3. Re-characterization of the business of the assessee as Knowledge Process Outsourcing (KPO) service provider.
4. Exclusion of certain comparable companies from the final set of comparables.
5. Charge of interest under section 234C of the Income Tax Act.
6. Depreciation on computer written off.

Detailed Analysis:

1. Re-computation of Operating Margin by the TPO:
The appellant company, a subsidiary of Smart Cube Ltd. UK, engaged in ITES, computed its Profit Level Indicator (PLI) at 19.05%, whereas the TPO computed it at 13.61%. The TPO excluded FOREX Fluctuation, Domestic Revenue, and Prior Period Expenses from the operating margin.

2. Exclusion of FOREX Fluctuation, Domestic Revenue, and Prior Period Expenses:
- FOREX Fluctuation: The Tribunal, referencing the appellant's own case for A.Y. 2011-12 and other cases like Fiserv India Pvt. Ltd. vs. DCIT, directed the TPO to consider FOREX Fluctuation as operating income, as it is directly connected to revenue receipts.
- Prior Period Expenses: The Tribunal upheld that prior period expenses should not be considered as part of operating expenses for calculating the operating margin, citing the case of Tupperware India Pvt. Ltd.
- Domestic Revenue: The Tribunal confirmed that domestic revenue should not be included in the computation of operating profit for Transfer Pricing (TP) adjustments, as it would skew the benchmarking analysis.

3. Re-characterization of Business as KPO Service Provider:
The TPO re-characterized the appellant's business as KPO, including companies engaged in KPO services in the comparables. The Tribunal, referencing the appellant's case for A.Y. 2011-12 and the Delhi High Court's decision in Rampgreen Solutions P Ltd., held that the appellant is an ITES company, not a KPO. Consequently, companies providing KPO services were excluded from the comparables.

4. Exclusion of Certain Comparable Companies:
- Acropetal Technologies Ltd.: Excluded as it provides KPO services.
- BNR Udyog Ltd.: Directed for exclusion if its Related Party Transactions (RPT) exceed 25%.
- Infosys BPO Ltd.: Excluded based on the Delhi High Court's consistent exclusion in similar cases due to its high turnover and brand value.
- Eclerx Services Ltd.: Excluded as it is engaged in KPO services.
- TCS E-Serve Ltd.: Excluded following the Delhi High Court's decision in Avaya India Pvt. Ltd., considering its high economic scale and brand value.

5. Charge of Interest under Section 234C:
The Tribunal directed the AO/TPO to charge interest under section 234C on the returned income of the assessee as per the law.

6. Depreciation on Computer Written Off:
The AO disallowed the deduction of Rs. 21,451/- for computer equipment written off, as the insurance claim was received and included in the block of assets. The Tribunal upheld the AO's decision, noting that the AO followed the DRP's directions and did not deny the claim of depreciation.

Conclusion:
- The appeal for A.Y. 2012-13 (ITA No.1178/Del/2017) was allowed.
- The appeal for A.Y. 2013-14 (ITA No.4607/Del/2017) was partly allowed.
- The Stay Application for A.Y. 2012-13 became otiose as the appeal was decided.

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