ITO 15(2)(1), MUMBAI vs. INVENTURUS KNOWLEDGE SERVICES P.LTD, MUMBAI

The grounds of appeal read as under:-

From the above grounds of appeal it transpires that there are two issues arising in this appeal.

The first issue is whether the gain of foreign exchange derivative transaction is speculative income or not.

The second issue is whether such gain on foreign exchange derivative transaction would qualify for claim of exemption u/s. 10AA, being business income of assessee as KPO.

Brief facts of the case the assessee is engaged in the business of providing Knowledge Process Outsourcing services from STCZ and is eligible for deduction u/s 10AA. During the course of assessment proceedings, it was found that the assessee had earned Rs.6,01,41,021/- on account of gain on foreign currency derivatives contracts, The same" was included by the assessee in the profits eligible for deduction u/s 10AA. .Since the foreign exchange fluctuation gain did not have any direct nexus with- the activity of providing KPO services from the SEZ, the same was proposed to be treated as speculative income by the assessing officer.

Before the AO it was contended that the assessee is engaged in providing BPO business to its customers located in USA and other countries and the earnings are denominated in foreign currency. It was also contended that the assessee had entered into foreign currency derivatives contracts in order to cover up future losses which may arise due to fluctuation in foreign currency rates. Such transactions are claimed to be covered by exceptions provided in section 43(5) and therefore it is the assessee's argument that profits or loss arising there from cannot be regarded as speculative profit or loss.

However the Assessing Officer was not convinced he held that, the gain is speculative in nature he further held that such derivative contracts are distinct from the contact of providing KPO Services. He held that therefore, the assessee’s contention that it has proximate nexus with the business of KPO services is not correct.

He further held that no services can be said to have been rendered which be correlated with the exchange fluctuation gain. There was no rendered corresponding to the gain arising on derivatives contract foreign currency. Therefore, gain arising on such derivatives transaction cannot be held to have a direct nexus with the assessee’s business and hence does not qualify for deduction u/s. 10AA.

Against the above order assessee appeal before the Ld. CIT(A).

The Ld. CIT(A) referred to the ITAT decision in assessee’s own case for AY 2009-10 wherein ITAT held that loss incurred on derivative transaction in foreign currency was not speculative loss. Accordingly, Ld. CIT(A) held that the gain was not speculative in nature.

As regards the claim that the said gain on foreign exchange derivative transaction qualify for deduction u/s. 10AA as assessee’s KPO business income, the Ld. CIT(A) referred to the same ITAT decision for earlier year. He noted that only difference was that in the earlier period there was a business loss even after deducting the gain arising on account of derivative contracts on foreign currency. That in the present appeal there being a positive income even after reducing gains on account of derivative contracts of foreign currency, exemption u/s. 10AA has been computed. Hence he held that following the decision of ITAT for AY 2010-11 he was deciding the issue in favour of assessee.

Against the above order revenue appeal before us.

We have heard both the counsel and perused the records Ld. Departmental Representative submitted that Ld. CIT(A) has totally erred in holding that the foreign currency derivative gain qualify for deduction u/s. 10AA. He submitted that the ITAT order referred by the Ld. CIT(A) was only on the issue whether these gains are speculative loss or not. He submitted that this cannot be treated as holding by the ITAT that these losses or gains were qualifying for exemption u/s. 10AA as business income of KPO business. Per contra Ld. Counsel for the assessee though fairly agreed that the above referred ITAT decision was not on the issue of qualification of this income as income qualifying for exemption u/s. 10AA. However, he submitted that he was relying upon the observations of the tribunal in this case, which support the case of the assessee.

Upon careful consideration we find that the issue that whether foreign exchange derivative transactions are speculative income or not has already been decided by the ITAT in favour of the assessee in its order dated 21.10.2015 AY 2009-10. The ITAT has concluded as under:-

Needless to add assessee should be granted adequate opportunity of being heard.

In the result this appeal by the revenue is partly allowed for statistical purposes.