2015 (8) TMI 1293 - AT - Income Tax

Foreign exchange loss / gain treated as operating in nature - Calculation of operating margin - Held that - We observe that it has not been disputed that the foreign exchange gain/loss has arisen as a consequence of the realization of the consideration for rendering software development 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. Thus we hold that operating revenue should be computed by including the foreign exchange gain/loss. See SAP LABS India (P.) Ltd. Versus Assistant Commissioner of Income-tax Circle-12 (3) Bangalore 2010 (8) TMI 676 - ITAT BANGALORE

Issues Involved:
1. Inclusion of foreign exchange gain/loss as operating income/loss.
2. Depreciation rate on networking equipment and active components.

Detailed Analysis:

1. Inclusion of Foreign Exchange Gain/Loss as Operating Income/Loss:

Revenue's Contention:
The Revenue argued that the CIT (Appeals) erred in holding that foreign exchange loss/gain is operating in nature. They contended that such loss/gain, which is attributable to the operating activity, is not derived from the operating activity. They further argued that the CIT (Appeals) did not ascertain the nexus between the forex gain/loss and the business activity of the taxpayer.

Respondent's Argument:
The respondent supported the CIT (Appeals) order, arguing that foreign exchange gain/loss should be part of the operating revenue for computing the assessee's margin for comparison with the margin of comparable companies. They cited decisions of coordinate benches of the Tribunal, including cases like Amba Research India Pvt. Ltd., Triology E-Business Software India Pvt. Ltd., and Sap Labs India (P) Ltd., which held in favor of including foreign exchange gain as part of operating revenue.

Tribunal's Decision:
The Tribunal upheld the CIT (Appeals) decision, stating that foreign exchange gain/loss has arisen as a consequence of the realization of consideration for rendering software development services. Therefore, there is no reason for its exclusion from operating revenues for calculating the operating margin of the assessee. The Tribunal referenced previous decisions in similar cases, including Amba Research India Pvt. Ltd., Mindteck (India) Ltd., and SAP Labs India (P) Ltd., which supported this view. Consequently, the grounds raised by Revenue on this issue were dismissed.

2. Depreciation Rate on Networking Equipment and Active Components:

Revenue's Contention:
The Revenue contended that the CIT (Appeals) erred in directing the Assessing Officer to allow depreciation at 60% on networking equipment and active components, as opposed to the 15% allowed by the Assessing Officer. They argued that there is no definition of "computers" as per the Income Tax Act, and it is not correct to expand the scope of "computers" to include networking equipment and active components for claiming higher depreciation.

Respondent's Argument:
The respondent supported the CIT (Appeals) order granting 60% depreciation on computer networking equipment and active components, except for metallic racks. They cited previous Tribunal decisions in the assessee's own case for Assessment Years 2007-08 and 2008-09, where the matter was remanded back to the Assessing Officer for fresh examination.

Tribunal's Decision:
The Tribunal noted that the same issue had been previously addressed in the assessee's own case for Assessment Years 2007-08 and 2008-09. In those instances, the Tribunal had remanded the matter back to the Assessing Officer for fresh consideration. Following the same approach, the Tribunal remanded the issue back to the Assessing Officer for fresh examination and adjudication, after affording the assessee adequate opportunity to present details and submissions. Consequently, this ground was treated as allowed for statistical purposes only.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, upholding the CIT (Appeals) decision on the inclusion of foreign exchange gain/loss as operating income/loss and remanding the issue of depreciation on networking equipment and active components back to the Assessing Officer for fresh consideration. The order was pronounced in the open court on 12th August, 2015.

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