ACUSUS SOFTWARE INDIA P LTD,BANGALORE vs. INCOME TAX OFFICER, WARD-11(1), BANGALORE

Per Vijay Pal Rao, Judicial Member These cross appeals are directed against the order dated 26.6.2014 of CIT (A) for the assessment year 2009-10. First we take up the appeal filed by the assessee wherein the assessee has raised various grounds. However, at the time of hearing, the learned AR of the assessee has stated at bar that the assessee presses only one issue regarding the treatment of foreign exchange fluctuations gain as operating in nature while computing the operating margin of the assessee for the purpose of determining the arm’s length price. Thus the learned AR stated that except the foreign exchange fluctuations being part of operating margin and benefit

“8. The learned CIT(A) has erred in not deciding on the treatment of foreign exchange fluctuation gain as operating in nature while computing the operating margin of Appellant and that of comparable companies.

9. The learned CIT(A) has erred in computing the arm’s length price while

providing the benefit of ± 5 percent under the proviso to section 92C of the Act;

10. The learned CIT(A) erred in confirming the imposition of interest under section 234B and 234C of the Act;”

There is no dispute regarding the most appropriate method adopted by the parties as Transaction Net Margin Method (TNMM). The TPO has worked out a negative working capital adjustment of 3.18% and accordingly arrived at the adjusted mean margin of 28.22%. Accordingly the TPO proposed an upward adjustment under section 92CA of Rs.2,66,09,306/- . The assessee challenged the action of the TPO before the CIT(A) and got part relief. Since the assessee has not pressed the other grounds in this appeal, therefore the only issue before us is regarding the treatment of foreign exchange gain for the purpose of determining the arm’s length price. The learned AR of the assessee has submitted that the foreign exchange gain is accrued due to fluctuation on the receivables from exports and therefore it will be a part of the operating profit of the assessee. In support of his contention, he has relied upon the following decisions:

1. M/s. SAP LABS India Pvt. Ltd., Vs. ACIT, Bangalore [2011] 44 SOT

156 (Bang.)

2. M/s. Trilogy E-Business Software India Pvt. Ltd., Vs. DCIT dated

23.11.2012 in ITA No. 1054/Bang/2011.

“B. As far as foreign exchange gain/loss being considered a not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd., Vs.

ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange fluctuation gains are required to be directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The Assessee in reply to the query of the TPO on the above aspect has not furnished any details. We are of the view that the Assessee should be afforded opportunity to explain its position on the above and the AO is directed to consider the same in accordance with law. As far as fringe

Benefit Tax (FBT) is concerned, the same was not considered by the TPO as part of operating cost in the case of comparables and therefore the same should also IT(TP) Nos .1105/Bang/2014 and 1043/Bang/2014 Page 5 of 9 not be considered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee”.

2. The CIT (A) erred in law as well as on facts in holding that, as the working capital adjustment provided by the TPO has negative impact on adjusted margin, the assessee is entitled to risk adjustment as per prevailing norms, which shall be worked out by the TPO and granted to the assessee without appreciating that risk adjustment could not be allowed in the absence of specific difference in risk and its impact on profit margin when TP regulations in India are against making any assumptions in respect of any adjustments and such risk adjustment cannot be provided without making necessary assumptions.

3. The CIT (A) erred in holding that foreign exchange loss / gain is operating in nature without appreciating that such loss / gain though attributable to IT(TP) Nos .1105/Bang/2014 and 1043/Bang/2014 Page 6 of 9

the operating activity is not derived from the operating activity and without ascertaining the nexus of the forex gain / loss with the business activity of the taxpayer.

4. The CIT(A) erred. in concluding that forex gain / loss are to be treated as operating in nature without appreciating that though they they may be incidental to the operating activity, they cannot be deemed as operating in nature since, they are not critical to operational activities of the business conducted by the taxpayer.

5. The CIT CA) erred in law as well as on facts by directing the TPO to decide the case of the assessee, by applying the principles emerging from the orders of the Delhi Bench of the Hon'ble Tribunal in Haworth (India) Pvt. Ltd. v Deputy Commissioner of Income-tax 11 ITR (Trib) 757 and the Bangalore Bench of the Hon'ble Tribunal in Trilogy E-Business Software v Deputy Commissioner of Income-tax 23 ITR(Trib) 464 without appreciating that in transfer pricing every case is unique and requires to be decided i.ndependently and that the directions issued are beyond the mandate of the provisions of Section 251(1)(a) of the I.T. Act which does not empower the CIT(A) to set aside the issue. 6. The CIT(A) erred in directing the AO to follow the ratio laid down by the Hon’ble High Court in the case of Tata Elxsi Limited 349 ITR 98 while computing the deduction u/s 10A by excluding the value of the telecommunication expenditure and expenses incurred in foreign currency from the total turnover also, without appreciating the fact that there is no in Section 10A that such expenses should be provision reduced from the total turnover also, as. clause (iv) of the explanation to Section 10A provides that such expenses are to be reduced only from the export turnover.

7. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the' department and an appeal has been filed before the Hon'ble Supreme Court.

8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.

9. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.

adjudication.

IT(TP) Nos .1105/Bang/2014 and 1043/Bang/2014 Page 7 of 9 and consider relevant material on record. The CIT(A) has observed that the TPO has worked out the negative working capital adjustment and therefore the assessee is entitled to risk adjustment as per the prevailing norms which shall be worked out by the TPO. The revenue is aggrieved by the directions of the CIT(A) for granting risk adjustment to be worked out by TPO. It is pertinent to note that since the assessee is a captive service provider and therefore there is a difference in the financial risk involved in the transactions between two independent parties and between the related parties as in the case of the assessee. Accordingly, in the facts and circumstances of the case, we do not find any error or irregularity in the order of the CIT(A) on this issue. However we direct the TPO to reconsider this issue after verification and examination of the relevant details and materials.

This issue is common as it was also involved in the appeal of the assessee.

In view of our finding on this issue while dealing with the appeal of the assessee, accordingly these grounds of the revenue appeal stand adjudicated on the same terms.

expenditure and other expenses incurred in foreign currency from export turnover as well as total turnover while computing deduction under section 10A.

IT(TP) Nos .1105/Bang/2014 and 1043/Bang/2014 Page 8 of 9 13. We have heard the learned DR as well as learned AR and consider the relevant material on record. The AO has excluded telecommunication expenditure and other expenses incurred in foreign currency from export turnover while computing deduction under section 10A. On appeal, the CIT(A) has decided this issue by following judgment of Hon’ble High Court in case of CIT Vs. Tata Elxsi Ltd., 349 ITR 98 and directed AO to exclude the said expenditure from total turnover as well. At the outset we note that this issue is covered by the Hon’ble jurisdictional High Court in the case of Tata Elxsi (Supra). Accordingly we do not find any error or irregularity in the impugned order of the CIT(A) qua this issue. The ground Nos. 6 and 7 of the revenue’s appeals are dismissed.

Pronounced in the open court on this 19th day of October, 2016.