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2021 (10) TMI 1408 - HC - Income TaxComputation of operating income/loss - Tribunal directing the assessing authority to include the foreign exchange fluctuation loss or gain as part of the operating income/loss - HELD THAT - This issue is covered by the decision of this Court in Pr. Commissioner of Income Tax and Another V/s. M/s. NXP Semi Conductors India Pvt. Ltd. 2018 (7) TMI 2311 - KARNATAKA HIGH COURT where one of us Hon ble SSJ was the member, considering the identical question, placing reliance on the Principal Commissioner of Income Tax and Another V/s. M/s. Softbrands India Pvt. Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT has held that no substantial question of law arises for consideration. Accordingly, appeal filed by the Revenue has been dismissed. TP Adjustment - Comparable selection - exclude both M/s. Bodhtree Consulting Ltd and Infosys Ltd., as comparables by holding that the said companies are functionally different from the assessee company - HELD THAT - This issue is covered by the decision of this Court in Principal Commissioner of Income-tax, Bangalore V/s. Softbrands India P Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT as held this Court cannot be expected to undertake the exercise of comparison of the comparables itself which is essentially a fact finding exercise. Neither the sufficient Data nor factual informations nor any technical expertise is available with this Court to undertake any such fact finding exercise in the said appeals under Section 260-A of the Act. Allowability of market loss - Whether Tribunal erroneously held the market loss is neither speculative nor contingent in nature when the said market loss is not allowable as per CBDT Instruction No.3/2010 dated 20.03.2010 as actual losses are allowable as non-speculative only if the transactions qualify as eligible derivative transactions under clause d of proviso to section 43 5 ? - HELD THAT - This issue is covered by the Co-ordinate Bench of this Court in the case of M/s. Quest Global Engineering Services Pvt. Ltd. 2021 (3) TMI 434 - KARNATAKA HIGH COURT as held loss sustained by the assessee due to fluctuation in foreign exchange while implementing export contract is incidental to assessee's course of business, therefore, such a loss is not a speculative loss but a business loss. The aforesaid findings have not been demonstrated to be perverse. substantial questions answered against the revenue and in favour of the assessee. Claim for loss on account of forward contracts in Forex derivatives - HELD THAT - As substantial question of law No.3 being answered in favour of the assessee, this realized gain/loss requires to be answered in favour of the assessee and against the Revenue. Accordingly, this substantial question of law is answered in favour of the assessee and against the Revenue. Exemption u/s 10A - whether is an exemption section although sections 10A and 10B as substituted by Finance ct, 2000, provide for deduction of the profits and gains derived from the export of articles, even though it is placed in Chapter III, section 10A begins with sentence subject to the provisions of this section, the deduction ? - HELD THAT - This question is covered by the decision of Commissioner of Income-tax V/s. Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT from a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income of the assessee in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression total income of the assessee in Section 10A as total income of the undertaking . Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly. Decided in favour of the assessee.
Issues Involved:
1. Inclusion of foreign exchange fluctuation loss or gain as part of operating income/loss. 2. Exclusion of certain companies as comparables in transfer pricing. 3. Allowability of market loss in respect of SEZ units. 4. Allowability of loss on account of forward contracts in Forex derivatives. 5. Interpretation of Section 10A as an exemption or deduction section. Detailed Analysis: Re. substantial question of law No.1: The issue pertains to whether the Tribunal was correct in directing the assessing authority to include foreign exchange fluctuation loss or gain as part of the operating income/loss. This issue was adjudicated based on the precedent set by the Karnataka High Court in the case of Pr. Commissioner of Income Tax and Another V/s. M/s. NXP Semi Conductors India Pvt. Ltd., where it was held that no substantial question of law arises for consideration. Consequently, the court answered this question in favor of the assessee and against the Revenue. Re. substantial question of law No.2: The Tribunal's direction to exclude M/s. Bodhtree Consulting Ltd and Infosys Ltd as comparables was challenged. The court referred to the decision in Principal Commissioner of Income-tax, Bangalore V/s. Softbrands India [P] Ltd., which emphasized that the High Court should not undertake the fact-finding exercise of comparing comparables. The court concluded that such issues do not give rise to any substantial question of law and upheld the Tribunal's findings, answering this question in favor of the assessee and against the Revenue. Re. substantial question of law No.3: The issue was whether the Tribunal was correct in allowing the market loss in respect of the assessee’s SEZ units. The court referred to the case of The Commissioner of Income-Tax and Another V/s. M/s. Quest Global Engineering Services Pvt. Ltd., which held that forward contracts entered into to hedge against foreign exchange fluctuation are not speculative losses but business losses. The court concluded that the Tribunal's decision was correct, answering this question in favor of the assessee and against the Revenue. Re. substantial question of law No.4: This question dealt with the allowability of loss on account of forward contracts in Forex derivatives. Given that the substantial question of law No.3 was answered in favor of the assessee, the court found that this realized gain/loss should also be answered in favor of the assessee and against the Revenue. Re. substantial question of law No.5: The interpretation of Section 10A was contested, whether it is an exemption section or a deduction section. The court referred to the Supreme Court’s decision in Commissioner of Income-tax V/s. Yokogawa India Ltd., which clarified that Section 10A provides for a deduction of profits and gains derived from eligible undertakings and should be computed independently before applying other provisions of the Income Tax Act. The court answered this question in favor of the assessee and against the Revenue. Conclusion: All substantial questions of law (Nos. 1 to 5) were answered in favor of the assessee and against the Revenue. Consequently, the appeal was dismissed.
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