2021 (9) TMI 1546 - AT - Income Tax

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 ... TP Adjustment - comparable selection - HELD THAT:- Deselection of comparables as functionally dissimilar with that of assessee.[Accentia Technologies Ltd., Acropetal Technologies Ltd., Coral Hubs Ltd.,Cosmic Global Ltd.,Eclerx Services Ltd., and Genesys International Corporation Ltd.] Foreign exchange fluctuation gain should be treated as part of operating revenue - We find that the assessee had derived foreign exchange fluctuation gains only on re-statement of outstanding debtors as on the balance sheet date. This, in our considered opinion, would certainly form part of only operating revenue of the company. Reliance in this regard has been rightly placed by the ld. AR on the Co-ordinate bench decision of this Tribunal in the case of India Medtronics Pvt. Ltd.,[2019 (10) TMI 122 - ITAT MUMBAI]. On perusal of the financial statements, we also find that the assessee company had not resorted to any hedging transactions as wrongly reported by the ld. DRP while adjudicating this issue. Accordingly, we direct the ld. TPO to include the forex gain as part of operating revenue. If the said forex gain is treated as operating revenue and the aforesaid six comparable companies are excluded, the assessee would be well within the +/-5% tolerance range as per proviso 2 to Section 92C(2) of the Act - we hold that there is no need to make any transfer pricing adjustment in respect of provision of IT enabled services by the assessee to its AEs. Denial of deduction u/s. 10A - interest income earned by the assessee - AO held that these fixed deposits were placed by the assessee out of surplus funds lying with it and hence, the interest earned thereon would be liable to be separately taxed under the head “income from other sources” and consequently not eligible for deduction u/s. 10A - HELD THAT:- We find that similar issue had cropped up in assessee’s own case before this Tribunal in A.Y. 2011-12 [2021 (7) TMI 53 - ITAT MUMBAI] wherein this Tribunal treated the said interest income as part of business receipts earned by the assessee by placing reliance on the decision of Hewlett Packard Global Soft Ltd [2017 (11) TMI 205 - KARNATAKA HIGH COURT]; decision of Cybertech Systems & Software[2018 (3) TMI 528 - BOMBAY HIGH COURT] wherein it was held that all profits and gains including incidental income of an Export Oriented Unit (EOU) even in the nature of interest on bank deposits or soft loans would be entitled for deduction u/s. 10A or 10B of the Act. Thus we direct the ld. AO to grant deduction u/s. 10A of the Act in respect of interest income earned on fixed deposits. Accordingly, the ground raised by the assessee is allowed. Treatment of forex gain and re-valuation of foreign currency held in EEFC account and consequently its eligibility to claim deduction u/s. 10A - HELD THAT:- As decided in own case [2021 (7) TMI 53 - ITAT MUMBAI] assessee has claimed deduction u/s. 10A of the Act, wherein deduction is available on the profits derived by the assessee on the entire profits and gains derived by the undertaking engaged in the business of export of articles or things. This Tribunal had also placed reliance on the decision of Motorola India Electronics Pvt. Ltd. [2014 (1) TMI 1235 - KARNATAKA HIGH COURT] wherein it was held that what is exempted is not merely the profits and gains of the export of articles but also the income from the business of the undertaking. Proceeding further, the Hon’ble High Court also observed that export profits kept in the EEFC account are the income of the business undertaking, hence the assessee would be entitled for deduction u/s. 10A of the Act for the same. Short grant of credit for TDS - HELD THAT:- We find that this is a matter of factual verification and the ld. AO is hereby directed to grant TDS credit in accordance with law. Accordingly, the ground No. 17 is allowed for statistical purposes. Deduction on account of education cess - HELD THAT:- We find that this additional ground deserves to be admitted as all the facts necessary for its adjudication are already on record and there is no dispute that assessee had indeed paid the education cess. Hence, following case of Sesa Goa Ltd.[2020 (3) TMI 347 - BOMBAY HIGH COURT] we direct the ld. AO to grant deduction on account of education cess paid by the assessee as an allowable business expenditure. Accordingly, the additional ground raised by the assessee is allowed. Issues Involved:1. Transfer Pricing Adjustment2. Denial of Deduction u/s 10A on Interest Income3. Treatment of Forex Gain and Revaluation of Foreign Currency in EEFC Account4. Short Grant of Credit for TDS5. Deduction on Account of Education CessSummary: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.