Forex fluctuation from international transactions treated as operating income, interest markup rejected, education cess deduction allowed under Section 37

ITAT Delhi ruled in favor of the assessee on multiple issues. The tribunal held that forex fluctuation from international transactions should be treated as operating income. Regarding interest on receivables, the TPO's addition of 400 basis points markup on LIBOR was rejected, as no benchmarking is required when no interest is charged by either party and amounts were received within 90-95 days. The tribunal also allowed deduction of education cess under Section 37, finding it doesn't fall under Section 40(a)(ii) restrictions.

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Issues Involved:
1. Foreign Exchange Fluctuation
2. Interest on Receivables
3. Deduction of Education Cess

Detailed Analysis:

Foreign Exchange Fluctuation:
During the year under consideration, the assessee recorded a foreign exchange gain of INR 10,17,49,505. The assessee argued that this gain arose from revenue receivables and export of services provided, forming an inherent part of the consideration received for export of services. It was contended that such gains should be included in the operating margin. The Tribunal agreed, noting that forex fluctuations are integral to 'transfer price' and thus should be treated as operating items. Reliance was placed on judgments such as PCIT vs. Ameriprise India (P.) Ltd., Mckinsey Knowledge Centre (P.) Ltd. v. Dy. CIT, and Virginia Transformer India P. Ltd. vs. ITO, concluding that forex gains/losses form part of the international transaction and should be included in the operating income.

Interest on Receivables:
The TPO reclassified outstanding receivables beyond the credit period of 30 days as deemed loans to the AE, imputing an interest addition of Rs.4,71,09,902/-. The assessee argued that these receivables are settled on an ongoing basis and are subsumed within the arm’s length price determination of the principal international transaction. The Tribunal found no need to benchmark the interest on receivables as the amounts were received within 90 to 95 days. Citing Pr. CIT vs. Kusum Health Care Pvt. Ltd. and Gillette India Limited, it was held that allowing credit periods for realization of sale proceeds is not an independent international transaction but is closely linked with the sale transactions of the AE. Thus, the appeal on this ground was allowed.

Deduction of Education Cess:
The assessee raised additional grounds for the deduction of Education Cess. The Tribunal, following the judgment of the Hon’ble Apex Court in National Thermal Power Co. Ltd. Vs CIT, admitted the additional ground. The assessee argued that education cess paid on Income Tax does not fall under the purview of Section 40(a)(ii) as it is levied on the amount of Income Tax, not on profits of business. The Tribunal referred to CBDT Circular No. 91/58/66-ITJ(19) and judgments from various courts, including Chambal Fertilisers and Chemicals Ltd. Vs JCIT, which held that education cess is an allowable expenditure. The Tribunal also noted that the proceeds from the collection of Education Cess are kept separate for a specified purpose, supporting the view that it is not in the nature of tax. Consequently, the Tribunal held that the assessee is eligible to claim the deduction of the 'Education Cess' under Section 37 of the Income Tax Act.

Conclusion:
The appeal of the assessee was allowed on all grounds. The Tribunal concluded that forex gains/losses should be treated as operating items, there is no need to benchmark interest on receivables within the allowed credit period, and education cess is allowable as a deduction under Section 37 of the Income Tax Act.

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