“foreign exchange gain or loss”

Foreign exchange fluctuations, whether gains or losses, are inextricably linked to the underlying business transaction and must be accounted for under the mercantile system. The Supreme Court also affirmed the standard accounting principle of valuing stock at cost or net realisable value, whichever is lower.

Foreign exchange fluctuation gains or losses are operational in nature and must be included in the computation of the operating margin for both the assessee and comparable companies when determining the Arm's Length Price.

An assessee must be given an adequate opportunity to explain its calculations before an adverse inference is drawn, as failing to do so violates principles of natural justice. Foreign exchange gains or losses are to be considered operating revenue or loss.

Profits derived from forward contracts entered into to avoid the risk of loss due to foreign exchange fluctuation are to be assessed as speculative profit and are not considered part of export turnover eligible for deduction under Section 10B, especially when the contracts are not isolated transactions.

Foreign exchange loss/gain is operational in nature if it is linked to exports/imports related to the particular year. Such gains or losses are treated as operational.

Foreign exchange fluctuation loss on circulating capital is a revenue expenditure if mercantile accounting is followed. A gain on cancellation of a forward contract taken to cover a foreign currency loan for capital assets is a capital receipt to be reduced from the cost of the asset.