2018 (1) TMI 325 - AT - Income Tax

TPA - rejection/non-inclusion of certain companies as comparable which were otherwise functionally similar on the ground that they follow accounting year other than financial year - Held that - As decided in CIT-II Vs Mckinsey Knowledge Centre India Pvt. Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT the revenue submits that comparable was correctly rejected by TPO because the company had different financial year ending on December 2006 whereas Assessee s financial year ended on March 2006. There is nothing shown to the court that supports the revenue s argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. . Thus resorted this issue back to the file of the TPO/AO with the direction to include the aforesaid comparable if from the available data on record the results for financial year can reasonably be extrapolated. Inclusion of amount pertaining to ESOPs twice in the operating cost base of the assessee - Held that - . In the present case it appears that the directions given by the ld. DRP has not been appreciated by the TPO in right perspective. It also appears that the TPO without appreciating the documentary evidences furnished by the assessee made this addition in the cost base taken by him. We therefore by considering the totality of the facts set aside this issue back to the file of the TPO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. Treatment of the foreign exchange fluctuation gain/loss as a non-operating item while computing the operating margin of the assessee and of the comparables companies - Held that - Hon ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT) held that Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under Section 37(1).

Summary

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.