2015 (10) TMI 461 - AT - Income Tax

Tribunal affirms CIT decisions on revenue treatment, expenses exclusion, jurisdiction, emphasizing judicial precedents

Dy. Commissioner of Income Tax, Circle 11 (1), Bangalore. Versus. M/s. Amba Research India Pvt. Ltd.,

The Tribunal upheld the CIT (Appeals) decisions, dismissing Revenue's appeal on all issues. It affirmed the treatment of foreign exchange gain as ... Transfer Pricing Issues - whether CIT(A) erred in holding that foreign exchange loss / gain to be operating in nature without ascertaining the nexus between the forex gain/loss with the business activity of the assessee and without appreciating that this gain/loss is not derived from the operating activity of the assessee? - Held 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. Following the decision of Triology E Business Software India Pvt. Ltd. (2013 (1) TMI 672 - ITAT BANGALORE ) we hold that operating revenue should be computed by including the foreign exchange gain/loss. - Decided against revenue. Computation of deduction u/s.10A - Held that:- We find that this ground is covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT ], wherein the Hon'ble Court has held that telecommunication expenses reduced from export turnover should also be reduced from export turnover while computing deduction under Section 10A of the Act. Respectfully following the aforesaid decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) the deduction under Section 10A of the Act by excluding the telecommunication expenses from both export turnover as well as from total turnover.- Decided against revenue. Issues Involved:1. Transfer Pricing Adjustment2. Deduction under Section 10A of the Income Tax Act3. Treatment of Foreign Exchange Gain/Loss4. Jurisdiction and Directions of CIT (Appeals)Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee company, engaged in providing ITES to its Associated Enterprises (AEs), reported international transactions for Assessment Year 2009-10. The TPO proposed a TP Adjustment of Rs. 4,08,55,503. The CIT (Appeals) partially allowed the assessee's appeal. Revenue contended that the CIT (Appeals) erred in holding foreign exchange loss/gain as operating in nature and directing the TPO to follow ITAT decisions in Haworth (India) Pvt. Ltd. and Trilogy E Business Software. The Tribunal upheld the CIT (Appeals) decision, stating that foreign exchange gain, arising from the realization of ITES services, should be included in operating revenue, following precedents set by the Tribunal in Mindteck (India) Ltd., Trilogy E Business Software India Pvt. Ltd., and Sap Labs India (P) Ltd.2. Deduction under Section 10A of the Income Tax Act:The CIT (Appeals) directed the Assessing Officer to exclude telecommunication and foreign currency expenses from both export and total turnover while computing the deduction under Section 10A, following the Karnataka High Court's decision in CIT V Tata Elxsi Ltd. Revenue argued that this decision was not accepted and was pending appeal before the Supreme Court. The Tribunal dismissed Revenue's contention, reaffirming the CIT (Appeals) directive based on the binding High Court decision.3. Treatment of Foreign Exchange Gain/Loss:Revenue challenged the CIT (Appeals) decision to treat foreign exchange gain/loss as operating in nature. The Tribunal held that since the foreign exchange gain arose from the realization of ITES services, it should be included in the operating revenue for computing the operating margin. This decision was consistent with the Tribunal's rulings in Mindteck (India) Ltd., Trilogy E Business Software India Pvt. Ltd., and Sap Labs India (P) Ltd.4. Jurisdiction and Directions of CIT (Appeals):Revenue contended that the CIT (Appeals) exceeded its mandate under Section 251(1)(a) of the IT Act by directing the TPO to follow specific Tribunal decisions. The Tribunal dismissed this contention, supporting the CIT (Appeals) directive to include foreign exchange gain in operating revenue and follow established Tribunal precedents.Conclusion:The Tribunal dismissed Revenue's appeal, upholding the CIT (Appeals) decisions on all contested issues. The Tribunal's order emphasized the inclusion of foreign exchange gain in operating revenue and the exclusion of telecommunication and foreign currency expenses from both export and total turnover for Section 10A deduction, in line with established judicial precedents.