TPO's failure to verify inconsistent foreign exchange loss treatment justifies section 263 revision proceedings

The ITAT Hyderabad dismissed the assessee's appeal in a revision case under section 263. The assessee had treated foreign exchange loss as operating expenses in assessment year 2017-18, deviating from its consistent treatment in other years (2015-16 to 2020-21). The TPO failed to verify this inconsistent treatment during assessment proceedings. The CIT(IT TP) found the TPO's non-verification prejudicial to revenue interests and directed fresh consideration. The ITAT upheld this decision, ruling that the TPO's failure to examine the assessee's inconsistent accounting treatment constituted an error warranting revision proceedings.

---

---

Issues:
1. Treatment of foreign exchange loss as operating or non-operating.
2. Jurisdiction under section 263 of the Income Tax Act.
3. Consistency in accounting treatment by the assessee.

Issue 1: Treatment of foreign exchange loss as operating or non-operating:
The appellant, engaged in various business activities, filed a revised return of income for the assessment year 2017-18, declaring an income of Rs. 1,77,52,150/-. The Transfer Pricing Officer (TPO) suggested an upward adjustment concerning interest on delayed receivables. The TPO proposed to consider foreign exchange transactions as operating in nature, but the appellant argued that foreign exchange loss should be treated as a non-operating expense based on precedents. The TPO revised the margin computation, and the appellant considered the foreign exchange loss as non-operating. The Principal Commissioner of Income Tax (PCIT) issued a notice under section 263, questioning the treatment of foreign exchange loss as operating. The PCIT directed the TPO to recompute the Arm's Length Price (ALP) of international transactions regarding foreign exchange loss.

Issue 2: Jurisdiction under section 263 of the Income Tax Act:
The appellant contended that since the TPO had already conducted an inquiry into the matter, the PCIT could not invoke jurisdiction under section 263. The appellant argued that the twin conditions under section 263 were satisfied, and therefore, there was no scope for revision. However, the PCIT proceeded with the proceedings under section 263, emphasizing the need to consider the consistent treatment of foreign exchange loss by the appellant in previous years.

Issue 3: Consistency in accounting treatment by the assessee:
The CIT (IT & TP) observed that except for the assessment year 2017-18, the appellant consistently treated foreign exchange loss as operating in other years. The CIT noted that the TPO failed to consider crucial tests for determining the nature of foreign exchange gain or loss. The CIT found that the appellant selectively treated foreign exchange loss as operating or non-operating to suit its benefit. The tribunal concluded that the failure to consider the consistent treatment of foreign exchange loss by the appellant in different years amounted to an error prejudicial to the interest of revenue. The tribunal dismissed the appeal, upholding the direction to the TPO to reconsider the issue after affording the appellant an opportunity to be heard.

In conclusion, the appellate tribunal upheld the direction to recompute the ALP of international transactions related to foreign exchange loss, emphasizing the importance of consistency in accounting treatment and the need to consider all relevant facts for accurate decision-making.

---