2018 (4) TMI 428 - AT - Income Tax

Deduction u/s 10A - exclude the communication charges from the export turnover as well as total turnover - Held that - The Hon ble Bombay High Court in case of CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT as well as ITO v. Sak Soft Ltd. (2009 (3) TMI 243 - ITAT MADRAS-D) have held that communication charges attributable directly to the export of article or thing outside India has to be excluded both from export turnover as well as total turnover while computing exemption u/s 10A of the Act. In view of the above, we are in agreement with the order of DRP and direct the AO to exclude the communication charges from the export turnover as well as total turnover while computing 10A deduction. Transfer pricing adjustment on account of corporate guarantee - Held that - Assessee has provided corporate guarantee to its AE in the current AY without charging any fees for the same. The term guarantee was inserted in the definition of international transaction by inserting an explanation in the Finance Act, 2012 with retrospective effect from 01/04/2012. There is no dispute that the corporate guarantee is an international transaction and different assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected to include this transaction as international transaction for the reason that the Finance Act, 2012, which has inserted an explanation, which will be applicable prospectively from AY 2013-14 and the corporate guarantee transaction will not be applicable to the current AY. Thus we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect Unrealised gains on foreign exchange forward contracts - Held that - Real gain/loss is only when the contracts are concluded. Therefore, recognition of this notional gain or loss depends upon accounting policies or method of accounting regularly followed by the assessee, since the assessee is following mercantile system of accounting, recognition of gain/loss are traceable over the years. Since, all the notional gain/loss are regularly declared by the assessee in its financial accounts. Therefore, in our opinion, assessee is consistently following a method of accounting and also discloses foreign currency transactions in its books of account and consistently following the same method of accounting over a period of time. As per the Instruction No. 03/2010 dated 23/03/2010 issued by CBDT notional losses are not allowed to set off against taxable income. Similarly, notional gain also should not be added to the taxable income. Therefore, in our considered view, assessee is allowed to follow its method of accounting followed by it consistently over the period and, therefore, notional gain on forex transaction should be allowed to reduce from the net profit, which is arrived for tax purpose. Accordingly, ground raised by the assessee is allowed.

Summary

Issues Involved:

1. Exclusion of communication charges from export turnover under Section 10A.
2. Transfer pricing adjustments for corporate guarantees.
3. Deduction of unrealized gain on foreign exchange forward contracts.
4. Timeliness of filing objections before the Dispute Resolution Panel (DRP).

Issue-wise Detailed Analysis:

1. Exclusion of Communication Charges from Export Turnover under Section 10A:

The revenue challenged the DRP's decision to exclude communication charges from export turnover. The Assessing Officer (AO) had excluded these charges while computing the deduction under Section 10A. The DRP directed the AO to reduce telecommunication charges not only from export turnover but also from total turnover for computing the deduction. The Tribunal reviewed the submissions and material facts, noting that higher courts and coordinate benches of ITAT have consistently held that internet charges should be excluded from both export and total turnover. Citing the Hon'ble Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. and ITAT Chennai Bench in ITO v. Sak Soft Ltd., the Tribunal upheld the DRP's order, dismissing the revenue's appeal.

2. Transfer Pricing Adjustments for Corporate Guarantees:

The assessee contested the transfer pricing adjustments made by the AO and TPO for corporate guarantees given to foreign subsidiaries. The TPO treated these guarantees as international transactions and proposed an arm's length price (ALP) adjustment. The assessee argued that the Finance Act, 2012, which included guarantees in the definition of international transactions, should apply prospectively from AY 2013-14. The Tribunal, referencing ITAT Delhi Bench in Bharati Airtel Ltd. and other cases, held that the explanation to Section 92B cannot be applied retrospectively. Consequently, the Tribunal rejected the treatment of corporate guarantees as international transactions for the relevant assessment year and allowed the assessee's appeal on this ground.

3. Deduction of Unrealized Gain on Foreign Exchange Forward Contracts:

The assessee claimed a deduction for unrealized gain on foreign exchange forward contracts, which the AO added back to the income. The DRP upheld the AO's action. The assessee argued that the gain was notional and consistent with its accounting method, which adds back unrealized losses and deducts unrealized gains. The Tribunal reviewed the accounting policies and judicial precedents, including CIT v. Indian Overseas Bank and CIT v. Woodward Governor India (P.) Ltd., which support the exclusion of notional gains from taxable income. The Tribunal concluded that the assessee's consistent accounting method should be respected, allowing the deduction of the notional gain and thereby allowing the assessee's appeal on this ground.

4. Timeliness of Filing Objections Before the DRP:

For AY 2011-12, the assessee's appeal was dismissed due to the late filing of objections before the DRP. The DRP declined to adjudicate the objections as they were filed beyond the allowed time under Section 144C(2). Consequently, the AO passed the final assessment order. The Tribunal noted that since the assessment order was not based on DRP's directions, the assessee had no jurisdiction to appeal before the Tribunal. Thus, the appeal was dismissed as not maintainable.

Summary:

The Tribunal dismissed the revenue's appeal regarding the exclusion of communication charges from export turnover. It allowed the assessee's appeal on transfer pricing adjustments for corporate guarantees and the deduction of unrealized gain on foreign exchange forward contracts. The assessee's appeal for AY 2011-12 was dismissed due to the untimely filing of objections before the DRP. The final pronouncement was made on February 28, 2018.