2016 (10) TMI 1202 - AT - Income Tax

Treatment of foreign exchange fluctuations gain as operating in nature - computing the operating margin of the assessee for the purpose of determining the arm s length price - Held that - The issue of treatment of foreign exchange fluctuations (gain/loss) accrued on account of export sales has been consistently considered as part of the operating margin for the purpose of determining transfer pricing analysis in a series of decisions by this tribunal. In the case of SAP LABS India Pvt. Ltd. Vs. ACIT (2010 (8) TMI 676 - ITAT BANGALORE) the tribunal held that if the foreign exchange (gain/loss) is accrued to the assessee on export sale then the same will be considered as operating in nature. Similarly the foreign exchange fluctuations on sales turnover of the comparables should also be considered as part of operating margins. Thus we direct the AO/TPO to recompute the operating margin of the assessee by considering the foreign exchange fluctuations (gain/loss) arising from export as operating in nature. Similarly the foreign exchange fluctuations (gain/loss) on sales shall be considered as part of operating margins of comparables for the purpose of determining arm s length price. Benefit of tolerance range as per the proviso to section 92C - Hed that - TPO is directed to consider the benefit of tolerance range as per the proviso to section 92C if the price of the assessee is within the range of 5% of the comparable price. Accordingly this ground is disposed off. Working capital adjustment - directions of the CIT (A) to consider the risk adjustment - Held that - It is pertinent to note that since the assessee is a captive service provider and therefore there is a difference in the financial risk involved in the transactions between two independent parties and between the related parties as in the case of the assessee. Accordingly in the facts and circumstances of the case we do not find any error or irregularity in the order of the CIT(A) on this issue. However we direct the TPO to reconsider this issue after verification and examination of the relevant details and materials Exclusion of telecommunication expenditure and other expenses incurred in foreign currency from export turnover as well as total turnover while computing deduction under section 10A - Held that - This issue is covered by the Hon ble jurisdictional High Court in the case of Tata Elxsi CIT Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT as held If the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator.

Summary

Issues:
1. Treatment of foreign exchange fluctuations gain as operating in nature for computing operating margin.
2. Benefit of tolerance range under proviso to section 92C of the Act.
3. Imposition of interest under section 234B and 234C of the Act.

Analysis:
1. Treatment of Foreign Exchange Fluctuations Gain:
The case involved determining whether foreign exchange fluctuations gain should be considered as part of the operating profit while computing the operating margin for transfer pricing analysis. The assessee argued that the gain accrued due to fluctuation on receivables from exports should be included in the operating profit. The Tribunal, after considering relevant precedents, held that foreign exchange fluctuations on export sales should indeed be considered as operating in nature for transfer pricing analysis. The tribunal directed the Assessing Officer to recompute the operating margin by including foreign exchange fluctuations in the operating profit for both the assessee and comparable companies.

2. Benefit of Tolerance Range:
The issue of the benefit of tolerance range under the proviso to section 92C of the Act was raised. The Tribunal directed the Transfer Pricing Officer to consider the benefit of tolerance range if the price of the assessee falls within the range of ± 5% of the comparable price. This ground was disposed of accordingly.

3. Imposition of Interest under Section 234B and 234C:
Regarding the imposition of interest under sections 234B and 234C of the Act, the Tribunal noted that it is mandatory and consequential, requiring no specific adjudication.

4. Revenue's Grounds:
The revenue raised various grounds challenging the CIT (A)'s order. These included issues related to risk adjustment, treatment of foreign exchange gain/loss, and exclusion of certain expenses from turnover while computing deduction under section 10A. The Tribunal upheld the CIT (A)'s directions on risk adjustment and treatment of foreign exchange gain/loss as operating in nature. It also affirmed the exclusion of telecommunication expenditure and foreign currency expenses from turnover as per the judgment in the Tata Elxsi case.

In conclusion, both the assessee's and revenue's appeals were partly allowed, with directions given for reevaluation and computation in line with the Tribunal's findings.