2017 (10) TMI 1416 - HC - Income Tax

TPA - gains/losses arising out of foreign exchange fluctuation too have to be benchmarked in the determination of ALP under Section 92CA - Held that - We find considerable force in the submission of ld. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules in any case were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export which was in US dollar. Therefore the entire receipts were on revenue account. The Court is of the opinion facially that like in the case of payment towards bank guarantee interest etc. the outgoings would essentially be covered as operative costs. Admit surviving question as follows - Did the Tribunal commit an error in excluding the data in respect of the comparables i.e. Aptico Ltd. Rights Ltd. and Kitco Ltd. and Apitco Ltd. Kitco Ltd. Tee Consulting Engineers Ltd Mahindra Consulting Engineers Ltd. Infoedge India Pvt. Ltd. and MMTV Ltd. having regard to the facts and circumstances of the case.

Summary

Issues:
1. Exclusion of comparables for benchmarking
2. Treatment of gains/losses arising from foreign exchange fluctuation in determination of ALP

Issue 1: Exclusion of comparables for benchmarking

The High Court addressed the first issue of excluding certain comparables for benchmarking under Section 260A of the Income Tax Act, 1961. The Revenue appealed against the ITAT's order excluding three comparables in one appeal and six comparables in another. The ITAT's reasoning highlighted that forex gain/loss occurs due to exchange rate variations and risk management policies, impacting profit margins. The Court observed that the Safe Harbour Rules were wrongly invoked and held that forex gain/loss should be treated as operating income/loss, aligning with the decision in Woodward Governor's case. Referring to a similar case, the Court concluded that the outgoings related to forex transactions should be considered as operative costs, dismissing the appeal on this aspect.

Issue 2: Treatment of gains/losses from foreign exchange fluctuation

Regarding the treatment of gains/losses arising from foreign exchange fluctuation in the determination of ALP under Section 92CA of the Income Tax Act, the ITAT's decision was analyzed. The Court agreed with the assessee's counsel that forex gain/loss should be considered as operating income/loss due to the nature of the transactions being revenue-based. The Court cited the Woodward Governor's case to support this position. The judgment in a similar case emphasized that the Safe Harbour Rules could not be applied retrospectively, further reinforcing the treatment of forex gain/loss as operational income/loss. The Court found no legal question arising from this issue and admitted the appeal for further proceedings.

In summary, the High Court's judgment addressed the exclusion of comparables for benchmarking and the treatment of gains/losses from foreign exchange fluctuation in the context of determining the ALP under the Income Tax Act. The Court clarified the treatment of forex gain/loss as operating income/loss, citing relevant legal precedents and dismissing the appeal on certain aspects while admitting it for further consideration on the exclusion of comparables issue.