ITAT allows forex gains as operating revenue, no transfer pricing adjustment needed within tolerance range under Section 92C(2)

ITAT Mumbai ruled in favor of the assessee on multiple issues. The tribunal held that foreign exchange fluctuation gains should be treated as operating revenue, and with exclusion of six functionally dissimilar comparable companies, no transfer pricing adjustment was required as the assessee fell within the +/-5% tolerance range under Section 92C(2). The tribunal allowed deduction under Section 10A for interest income on fixed deposits and forex gains in EEFC account, treating them as business income of the export-oriented undertaking. Additionally, the tribunal directed the AO to grant TDS credit and allow deduction for education cess as business expenditure.

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Issues Involved:

1. Transfer Pricing Adjustment
2. Denial of Deduction u/s 10A on Interest Income
3. Treatment of Forex Gain and Revaluation of Foreign Currency in EEFC Account
4. Short Grant of Credit for TDS
5. Deduction on Account of Education Cess

Summary:

1. Transfer Pricing Adjustment:

The assessee challenged the transfer pricing adjustment made by the Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, based on the directions of the Dispute Resolution Panel (DRP). The assessee, engaged in ITES call centre operations, benchmarked its transactions using the Transaction Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) included/excluded certain comparables, resulting in an adjustment of Rs. 105,74,53,035/-. The Tribunal directed the exclusion of six comparables previously held non-comparable in the assessee's case for A.Y. 2008-09, and inclusion of forex gain as operating revenue. This brought the assessee within the +/-5% range as per proviso 2 to Section 92C(2) of the Act, negating the need for transfer pricing adjustment.

2. Denial of Deduction u/s 10A on Interest Income:

The AO denied deduction u/s 10A on interest income from fixed deposits, treating it as "income from other sources." The Tribunal, following its decision in the assessee's case for A.Y. 2011-12 and other judicial precedents, directed the AO to grant the deduction, recognizing the interest as part of business receipts.

3. Treatment of Forex Gain and Revaluation of Foreign Currency in EEFC Account:

The AO denied deduction u/s 10A on forex gain and revaluation of foreign currency in the EEFC account, deeming it not "derived" from the business. The Tribunal, referencing its decision for A.Y. 2011-12 and relevant case laws, held that such gains are part of business income and directed the AO to allow the deduction.

4. Short Grant of Credit for TDS:

The Tribunal directed the AO to verify and grant the correct TDS credit in accordance with the law.

5. Deduction on Account of Education Cess:

The Tribunal admitted the additional ground for deduction on education cess, following the decision of the Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd., and directed the AO to allow it as a business expenditure.

Conclusion:

The appeal of the assessee was partly allowed, addressing each issue as per the Tribunal's directions.

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