2020 (8) TMI 815 - AT - Income Tax

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 ... TP Adjustment - re-computation of operating margin by the TPO - TPO excluded FOREX Fluctuation, Domestic Revenue and Prior period expenses - HELD THAT:- As relying on own case we direct the AO/ TPO to consider FOREX Fluctuation as income to be in operating in nature while working out the profit margin of the appellant. Prior period expenses - As decision of the Co-ordinate Bench in the case of Tupperware India Pvt. Ltd. [2014 (10) TMI 429 - ITAT DELHI] wherein the Tribunal has held that prior period expenses are not to be considered as part of operating expenses for the purpose of calculating the operating margin. Domestic revenue - Same cannot be taken into account for computing the operating profit as under the TP adjustments. The transactions and revenue related to the associated enterprises are considered to determine the arm’s length price of a transaction. In our considered view, if the domestic sale were to be taken into consideration, the bench marking analyses for determining the ALP of a transaction would be skewed. We accordingly confirmed the exclusion of domestic sales. TPA - Comparable selection - Re-characterised the business of the assessee as KPO service provider and has considered companies engaged in the business of providing KPO service in the final set of comparable companies - HELD THAT:- We have carefully considered the outsource service agreement dated 20.02.2010 entered into between the appellant with its AE. We find that the scope of work carried out by the appellant is merely data processing/ data feeding - We further find that in A.Y 2011-12, the Tribunal in assessee’s own case has held that the appellant is not a KPO. Considering the past and the future history of the appellant, we hold that the assessee is an ITES company, therefore, comparable companies which pertain to KPO service provider are directed to be excluded. Comparable selection - Considering the appellant as ITES service provider companies functionally dissimilar with that of assessee need to e deselected from final list. TPO has adopted RPT filter @ 25% - RPT filter in excess of 25% company should be excluded from final set of comparables. Infosys BPO Ltd. need to be excluded as comparable Eclerx Services Ltd. a company engaged in the provision of KPO service and therefore cannot be regarded as an appropriate comparable for benchmarking the international transactions of provision of BPO services Exclusion of TCS E-Serve Ltd. - Brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. Depreciation on computer written off - AO proposed to disallow the same as it was not an eligible expense - HELD THAT:- We have carefully perused the assessment order, we do not find anywhere that the claim of depreciation was denied by the AO. The only observation is in respect of the denial of deduction on account of it being a capital loss. We further find that the AO’s decision is pursuant to the directions of the DRP and it cannot be said that the AO has not followed the directions of the DRP. We therefore do not find any merit in this grievance of the assessee and the same is accordingly dismissed. 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.