2018 (7) TMI 467 - HC - Income Tax

TPA - include forex gain/loss as operating in nature - deduction u/s 10A - substantial question of law - Held that - In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. We direct the AO/TPO to recomputed 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 In these type of findings of the learned Tribunal remained final fact findings of the learned Tribunal and are binding on the lower authorities of the Department as well as this Court and unless an established ex-facie perversity is found in the findings of the learned Tribunal, the appeal u/s.260A of the Act is not maintainable. See M/S. SOFTBRANDS INDIA P. LTD. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT

Summary

Issues:
1. Interpretation of foreign exchange gain/loss as operating in nature.
2. Exclusion of telecommunication and other expenses from export turnover for deduction under section 10A.

Interpretation of Foreign Exchange Gain/Loss:
The Revenue raised the first substantial question of law regarding the treatment of foreign exchange gain/loss as operating in nature without ascertaining its nexus with the business activity of the taxpayer. The Tribunal, citing previous decisions, held that foreign exchange fluctuations on export sales should be considered as part of the operating margin for transfer pricing analysis. The Tribunal directed the AO/TPO to recomputed the operating margin by considering foreign exchange fluctuations arising from export as operating in nature. The judgment referred to the decision in CIT v. Tata Elxsi Ltd. where it was held that what is excluded from export turnover must also be excluded from total turnover to align with legislative intent.

Exclusion of Expenses from Export Turnover:
Regarding the second substantial question of law, the Revenue did not press the issue as it was clarified that expenses incurred for export turnover should also be deducted from total turnover for computing the deduction under section 10A. The judgment referenced the decision in the case of HCL Technologies Ltd. where it was emphasized that deductions on expenses like freight, telecommunication, and insurance attributable to the delivery of computer software under section 10A should be allowed from both export turnover and total turnover to avoid illogical results.

Conclusion:
The High Court dismissed the appeal by the Revenue as it did not raise any substantial question of law. The judgment highlighted that issues related to comparables and filters for determining the correct list of comparables do not constitute substantial questions of law. It was emphasized that dissatisfaction with Tribunal findings is not sufficient to invoke Section 260-A of the Act. The Court clarified that the same parameters apply to appeals filed by Assessees as well. The appeal by the Revenue was found devoid of merit and dismissed with no order as to costs.