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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ A ’
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the Revenue is directed against the final order of assessment. For Assessment Year 2010-11 passed under Section 143(3) rws 144C of the Income Tax Act, 1961 (in short 'the Act') on 29.12.2014, in pursuance of the directions of the Dispute Resolution Panel (‘DRP’) issued under Section 144C(5) of the Act vide order dt.27.11.2014.
The facts of the case, briefly, are as under :- 2.1 The assessee company, engaged in the business of manufacture and sale of cutting tools, operates in two segments namely, manufacturing and trading. For Assessment Year 2010-11, the assessee filed its return of income on 22.9.2010 declaring income of Rs.1,36,90,342 under normal provisions and Rs.32,93,09,017 under Section 115JB of the Act. The return was processed under Section 143(1) of the Act and the case was taken up for 2 IT(T.P)A No.217/Bang/2015 scrutiny. The draft assessment was completed under Section 143(3) rws 144C of the Act vide order dt.28.2.2014 wherein the income was determined at Rs.3,65,67,305 which included a Transfer Pricing Adjustment of Rs.2,28,77,016 to the Arm’s Length Price (‘ALP’) of the assessee's international transactions as proposed by the Transfer Pricing Officer (‘TPO’) in his order under Section 92CA of the Act dt.12.9.2013. 2.2 Aggrieved by the draft order of assessment for Assessment Year 2010-11 dt.28.2.2014, the assessee filed its objections thereto before the DRP. The DRP issued its directions thereon under Section 144C(5) of the Act vide order dt.27.11.2014 allowing the assessee relief of Rs.2,28,77,016 in respect of the T.P. Adjustment. Pursuant thereto, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C of the Act vide order dt.29.12.2014 allowing the assessee ;the relief of Rs.2,28,77,616 as allowed by the DRP and thereby accepting the returned income of Rs.1,36,90,342 under the normal provisions and ‘Book Profits’ under Section 115JB of the Act at Rs.3,23,09,017.
Revenue, being aggrieved by the final order of assessment for Assessment Year 2010-11 dt.29.12.2014, has preferred this appeal raising the following grounds :- “
1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case.
2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in holding that foreign exchange loss/gain is operating in nature without ascertaining its nexus with the business activity of the assessee and without appreciating the fact that such loss/gain that is attributable to the operating activity is not derived from the operating activity.
3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in concluding that forex gain/loss are to be treated as operating in nature as while they may be incidental but cannot be deemed as operating in nature since, they are not critical to operational activities of the business conducted by the assessee.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds maybe reversed.
5. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”
4. The Grounds at S.Nos.1, 4 and 5 being general in nature and not specifically urged before us, no adjudication is called for thereon. 5.1 In the Ground Nos.2 and 3, Revenue contends that the DRP erred in holding that foreign exchange gain/loss to be operating in nature without ascertaining the nexus between the 3 IT(T.P)A No.217/Bang/2015 forex gain with the business activity of the assessee and without appreciating that this gain is not derived from the operating activity of the assessee. The learned Departmental Representative was heard in support of the grounds raised
. 5.2 Per contra, the learned Authorised Representative supported the impugned order of the DRP in holding foreign exchange gain/loss to be part of the operating revenue for the purpose of computing the assessee's margin for comparison with the margin of the comparable companies. The learned Authorised Representative contended that revenue’s appeal on this issue is liable to be dismissed as the issue of foreign exchange gain being part of the operating revenue’s for the purpose of computing the assessee's margin has been held in favour of the assessee by the decision of the co-ordinate benches of this Tribunal, inter alia, in the case of NXP Semi Conductors India Pvt. Ltd. in IT(TP)A No.1662/Bang/2014 dt.12.8.2015 which has followed the decisions of earlier co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) and Sap Labs India (P) Ltd. (2011)
44. SOT 156 (Bang). 5.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain/loss has arisen as a consequence of the realization of the consideration in the course of business operation for rendering software development of the assessee and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. The DRP in its order at para 2.7 thereof, following the order of the co-ordinate bench of this Tribunal in the case of SAP Labs India Pvt. Ltd. (supra) has held and directed the A.O. to consider foreign exchange fluctuation as operating in nature in respect of the assessee as well as the comparable companies while determining the margins in the case on hand. We find that this proposition has been upheld by a co-ordinate bench of this Tribunal in the case of NXP Semi Conductors India Pvt. Ltd. in IT(TP)A No.1662/Bang/2014 dt.12.8.2015 wherein at para 4.3 thereof it has been held as under :- “ 4.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain/loss has arisen as a consequence of 4 IT(T.P)A No.217/Bang/2015 the realization of the consideration for rendering software development services and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. We find that this proposition has been upheld by a co-ordinate bench of this Tribunal in the case of Amba Research India Pvt. Ltd. in IT(TP)A No.1376/Bang/2014 dt.17.4.2015 wherein at para 5.7 thereof it has been held as under :- “ 5.7 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain has arisen as a consequence of the realization of the consideration for rendering ITES services and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. We find that this proposition has been upheld by a co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. in IT(TP)A No.70/Bang/2014 dt.21.8.2014 wherein at para 11 thereof it has been held as under :- “11. We have considered the rival submissions. It is not disputed by the Revenue that the foreign exchange fluctuation has arisen as a result of the realization of the consideration for rendering software development services. It is therefore incurred in the normal course of business and therefore there is no reason why it should be excluded from determining the operating revenue for the purpose of calculation of operating margin. In our view, the analogy drawn by the DRP regarding exclusion of interest expenses while computing operating margins is not proper. In our view, foreign exchange gain on realization of consideration for rendering software development services should be regarding as part of the operating revenue. Following the decision of the ITAT, Bangalore Bench in the case of SAP Labs (supra), we hold that the operating revenue for the assessee be computed by including the foreign exchange gain.” Following the decision of the co-ordinate benches of this Tribunal in the case of Sap Labs India (Pvt.) Ltd. (surpa), Triology E Business Software India Pvt. Ltd. (supra) and Mindteck (India) Ltd. (supra), we hold that operating revenue should be computed by including the foreign exchange gain. Consequently, the grounds at S.Nos.2 to 4 raised by revenue are dismissed.” Following the decision of the co-ordinate benches of this Tribunal in the case of Sap Labs India (Pvt.) Ltd. (surpa), Triology E Business Software India Pvt. Ltd. (supra), Mindteck (India) Ltd. (supra) and Amba Research India Pvt. Ltd. (supra), we hold that operating revenue should be computed by including the foreign exchange gain/loss. Consequently, the grounds at S.Nos.2 to 4 raised by revenue are dismissed.”
5.4 Following the decision of the co-ordinate benches of this Tribunal in the cases of Sap Labs India (Pvt.) Ltd. (surpa), Triology E Business Software India Pvt. Ltd. (supra), Mindteck (India) Ltd. (supra) and NXP Semi Conductors India Pvt. Ltd. (supra), we hold that operating 5 IT(T.P)A No.217/Bang/2015 revenue should be computed by including the foreign exchange gain. Consequently, the grounds at S.Nos.2 & 3 raised by revenue are dismissed.
In the result, Revenue’s appeal for Assessment Year 2010-11 is dismissed.
Order pronounced in the open court on 28th July, 2015.