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Income Tax Appellate Tribunal, DELHI BENCH: ‘I’ NEW DELHI
Before: SHRI SAKTIJIT DEY & DR. B.R.R. KUMAR
assessment order dated 29.08.2018 passed under section 143(1)/92CA/3)/144C(1) of the Income-tax Act, 1961 (in short ‘the Act’) pertaining to assessment year 2014-15, in pursuance to the direction of learned Dispute Resolution Panel (DRP).
The first issue arising for consideration is, whether foreign exchange fluctuation gain can be treated as operating income while computing the operating profit margin.
3. Briefly the facts are, the assessee is a resident corporate entity engaged in the activity of business process outsourcing (BPO)/debt Processing. It is a wholly owned subsidiary of M/s.
Omniglobe International LLC, USA, the Associated Enterprises (AE) of the Assessee. In the year under consideration, the assessee provided BPO services to its AE. The assessee benchmarked the transaction by applying Transactional Net Margin Method (TNMM) and reported the transaction with AE to be at arm’s length. Transfer Pricing Officer (TPO), in course of proceeding before him, modified/re-computed the profit margin at 4.59% as against 7.88 % shown by the assessee, by excluding foreign exchange fluctuation gain, which the TPO treated as non- operating income. Accordingly, he proposed an adjustment of Rs.1,79,33,580/-. Against the draft assessment order passed incorporating such adjustment, the assessee preferred an appeal before learned DRP. Accepting assessee’s submission, learned DRP held that since the assessee bears foreign exchange risk, considering the fact that assessee’s functional currency is in 2 | P a g e rupees and it gets payments in US Dollar, learned DRP directed the TPO to treat foreign exchange fluctuation gain as operating in the nature. Despite such direction of learned DRP, the TPO following the direction of DRP in assessee’s own case in assessment year 2012-13, stuck to his earlier decision.
We have considered rival submissions and perused the materials on record. Undisputedly, the TPO has refused to treat foreign exchange fluctuation gain as operating income for computing the operating profit margin by relying upon the directions of learned DRP in assessment years 2012-13. However, while deciding assessee’s appeal for assessment year 2012-13, the Tribunal in dated 07.01.2018 has directed the TPO to consider foreign exchange fluctuation gain as operating income for computing operating margin of the assessee.
Same view was reiterated by the Tribunal while deciding assessee’s appeal in assessment year 2013-14 in dated 15.10.2018. In any case of the matter, when learned DRP has directed the TPO to compute the operating margin of the assessee by considering foreign exchange fluctuation gain as operating income, AO/TPO could not have disregarded the direction of the DRP. 3 | P a g e
Be that as it may, in our view, the issue is squarely covered in favour of the assessee by the decisions of the Tribunal in assessee’s own case in assessment years 2012-13 and 2013-14, as discussed above. For the sake of completeness, we must observe at the time of hearing, learned CIT(DR) has drawn our attention to certain observations of the Tribunal in the appellate order passed for assessment year 2012-13 and had submitted, as
per the Safe Harbour Rules introduced to the Statute w.e.f.
18.09.2013, the foreign exchange fluctuation gain/loss cannot be treated as operating income/loss for computing the operating profit margin of the assessee. In the context of the aforesaid submission of learned CIT(DR), we must observe, firstly Safe Harbour Rules can be applied only at the option of the assessee and not otherwise. In any case of the matter, in the facts of the present appeal, the TPO has made adjustment without taking recourse to Safe Harbour Rules. That being the case, contention of learned CIT(DR) cannot be accepted.
Before us, learned counsel for the assessee has furnished a working to demonstrate that, in case, foreign exchange fluctuation gain is treated as operating income, assessee’s margin would be 7.88%, which will come within the range of + 3% of 4 | P a g e average operating profit margin of comparables worked out at 9.91%. The Assessing Officer is directed to verify the working and delete the addition.
The next issue arising for consideration is transfer pricing adjustment of Rs.36,29,836/- on account of delayed receivables from AE. While verifying the documents relating to international transactions with the AE, the Assessing Officer noticed that in certain instances, the assessee received remittances after expiry of credit period. Thus, re-characterizing the delay in receipt of receivables as unsecured loan, the Assessing Officer computed interest by applying rate of 4.33% on the basis of 6 months LIBOR with a mark-up of 400 basis points. Learned DRP upheld the adjustments made by the TPO.
Before us, learned counsel appearing for the assessee submitted that the receivables on which the Assessing Officer has imputed interest on account of delay are in relation to provision of BPO services to the AE. He submitted, since the receipts of remittances against invoices raised are closely linking with the provision of BPO services, it cannot be segregated and treated as a separate international transaction. In this contest, he relied upon the following decisions: 5 | P a g e
1. Pr. CIT Vs. Kusum Healthcare Pvt. Ltd., ITA
No.765/2016 (Delhi High Court)
2. Avenue Asia Advisors Pvt. Ltd. Vs. DCIT, 398 ITR 120
Further, he submitted, the assessee more or less is a debut free company and has no interest liability. He submitted, the assessee has reserve and surplus of Rs.18,31,24,532/-.
Therefore, he submitted, since, the assessee does not have substantial interest liability, no interest can be imputed on the outstanding receivables. In support of such contention, he relied upon a decision of the Tribunal in case of Bechtel India Pvt. Ltd. Vs. DCIT (ITA No.1478/Del/2015). He submitted, the aforesaid decision of the Tribunal was upheld by the Hon’ble Delhi High Court in ITA No. 379/2016. Further, he submitted, Revenue’s Special Leave Petition against the decision of the Hon’blle Delhi High court was dismissed by the Hon’ble Supreme Court.
Additionally, he relied upon the following decisions:
Kadimi Tool Manufacturing Co. (P) Ltd. Vs. DCIT (87
taxmann.com 42)
2. Inductis (India) Private Ltd. Vs. ITO (ITA
No.2075/Del/2015)
Global Logic India Ltd. Vs. DCIT (ITA No.
1104/Del/2015, 1115/Del/2017 and ITA No.
7621/Del/2017)
Strongly relying upon the observations of TPO and DRP, learned CIT(DR) submitted that by allowing AE to hold on remittances the assessee certainly has allowed benefit to the AE to utilize the fund. Thus, for the period for which the AE had retained the remittances can be treated as loan. Further, he submitted, in case of delay in remittance by the AE, the assessee will be bearing foreign exchange remittances risk. Thus, he submitted, the adjustment made should be sustained.
We have considered rival submissions and perused the materials on record. Though, we agree with learned CIT (DR) that there may be instances where the AE is benefited due to delay in remitting the outstanding receivables, however, it depends upon the facts of each case. In the present case, admittedly, the assessee has very negligible interest liability. Further, on perusal of materials placed before us, it is observed that the only borrowing made by the assessee is loan availed for purchasing vehicle. There is no dispute that the assessee had utilized the loan for the purpose of which it was availed and paying interest 7 | P a g e on that. Further, on perusal of the documents placed before us, it is observed that in the year under consideration, the assessee has paid interest of small amount of Rs.56,497/-. Thus, from the aforesaid facts it is clear that the assessee is more or less a debt free company, whereas, it has substantial reserve and surplus.
Thus, Keeping in view the ratio laid down in the decisions cited before us, we hold that no adjustment on account of interest on outstanding receivables can be made in the facts of the present appeal. Accordingly, we delete the adjustment.
In the result, the appeal is allowed, as indicated above.
Order pronounced in the open court on 19th October, 2022