ASST. CI.T., BANGALORE vs. M/S DENSO KIRLOSKAR INDUSTRIES PVT. LTD., BANGALORE

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ITA 81/BANG/2015Status: DisposedITAT Bangalore29 May 2015AY 2010-114 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that foreign exchange fluctuation gains arising from the realization of sale proceeds are an integral part of the business activity. Therefore, they should be treated as operating income for computing the ALP.

What were the facts?

The assessee, engaged in manufacturing, had international transactions with its Associated Enterprise (AE). The dispute arose over whether foreign exchange gains from realizing sale proceeds should be treated as operating revenue for determining the Arm's Length Price (ALP). The Assessing Officer (AO) refused this, but the CIT(Appeals) allowed it.

What were the issues?

Whether foreign exchange gains/losses arising from the realization of sale proceeds are to be considered as operating in nature for the purpose of determining the Arm's Length Price (ALP) under the Transaction Net Margin Method (TNMM).

Which sections of the Income-tax Act were involved?

Section 92

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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE

Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ

For Appellant: Shri S. Radhakrishna, CIT-III(DR)
For Respondent: Shri K.R. Vasudevan, Advocate
Hearing: 25.05.2015Pronounced: 29.05.2015

Per N.V. Vasudevan, Judicial Member

1.

This appeal by the Revenue is against the directions of the DRP u/s. 144C(5) dated 27.11.2014. The grounds raised by the Revenue in the appeal reads as follows:-

IT(TP)A No.81/Bang/2015 Page 2 of 4

“1. The directions of DRP is opposed to law and facts of the case. 2. The Hon’ble DRP has erred in directing the TPO to include forex gain/loss as operating in nature without ascertaining the nexus with the business activity of the tax payer. 3. For these and such other grounds that may be urged at the time of hearing.”

2.

The assessee is a company engaged in the business of manufacture of aluminum radiator and air-conditioners for cars and multi- utility vehicles. The assessee entered into an international transaction with its AE viz., Denso, Japan. The arm’s length price (ALP) in respect of the international transaction carried out by the assessee with its AE had to be determined in view of the provisions of section 92 of the Act. The narrow issue that arises for consideration in this appeal is as to whether the foreign exchange gain which the assessee received by reason of fluctuation in foreign exchange at the time of realization of the sale proceeds should be considered as part of operating revenue while computing the ALP.

3.

There is no dispute that Transaction Net Margin Method (TNMM) was the most appropriate method for determination of ALP. The Profit Level Indicator (PLI) chosen was operating profits to total revenue. The AO refused to accept the claim of the assessee that foreign exchange gain should also be treated as part of operating revenue for the purpose of computing operating margin of the assessee and the comparable

IT(TP)A No.81/Bang/2015 Page 3 of 4 companies. The CIT(Appeals), on the other hand, following the decision of the ITAT Bangalore Bench in the case of SAP Labs India Pvt. Ltd. v.

ACIT (2011) 44 SOT 156, wherein it was held that foreign exchange fluctuation gain is nothing but integral part of the sale proceeds of the assessee carrying on export business and that the same should be treated as operating income. The CIT(Appeals), following the aforesaid decision, directed the AO to compute margin of the assessee and comparable companies treating the foreign exchange gain/loss as operating in nature.

4.

Aggrieved by the order of the CIT(Appeals), the Revenue has preferred the present appeal before the Tribunal. The ld. DR reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal. We are of the view that the stand taken by the Revenue is unsustainable. It is not disputed that the foreign exchange fluctuation and the resulting gain to the assessee was in respect of the sale proceeds which the assessee had to realize. In such circumstances, it cannot be contended by the Revenue that the nexus of the foreign exchange gain with the business activity of the tax payer has not been ascertained by the DRP. We therefore do not find any merits in this appeal by the Revenue. Consequently the same is dismissed.

IT(TP)A No.81/Bang/2015 Page 4 of 4 In the result, the appeal of the revenue is dismissed. 5. Pronounced in the open court on this 29th day of May, 2015.

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