2024 (8) TMI 529 - AT - Income Tax

Revision u/s 263 - assessee treating the foreign exchange loss as operating - HELD THAT - There is no strength in the argument of AR that the assessee placed before the learned TPO all the material sufficient to take a view and, therefore, the assessee cannot be put to peril for the TPO not considering such material. Here, the prime factor relates to the consistent treatment given by the auditors to the foreign exchange gain/loss and unless and until assessee establishes that such a fact of the assessee treating the foreign exchange gain/loss as operative for the assessment years between 2015-16 and 2020-21, except 2017-18, being borne on record before the TPO such an argument is not at all helpful to it. Observation of the CIT(IT TP) that at the cost of consistency and bonafide intention, only to cause leak of revenue, the assessee adopted a different criterion for the assessment year 2017-18 goes undisturbed and its non-verification by the learned TPO is fatal to the assessment proceedings. We are of the considered opinion that non-considering of the consistent treatment given by the assessee to the foreign exchange gain/loss either prior or subsequent to 2017-18 amounts to error insofar as it is prejudicial to the interest of Revenue and, therefore, we find it difficult to hold that the learned CIT (IT TP) committed anything illegality or irregularity in setting it aside and directing the learned TPO to consider the issue afresh, after affording an opportunity of being heard to the assessee. Appeal of the assessee is dismissed.

Summary

Issues:
1. Treatment of foreign exchange loss as operating or non-operating.
2. Jurisdiction under section 263 of the Income Tax Act.
3. Consistency in accounting treatment by the assessee.

Issue 1: Treatment of foreign exchange loss as operating or non-operating:
The appellant, engaged in various business activities, filed a revised return of income for the assessment year 2017-18, declaring an income of Rs. 1,77,52,150/-. The Transfer Pricing Officer (TPO) suggested an upward adjustment concerning interest on delayed receivables. The TPO proposed to consider foreign exchange transactions as operating in nature, but the appellant argued that foreign exchange loss should be treated as a non-operating expense based on precedents. The TPO revised the margin computation, and the appellant considered the foreign exchange loss as non-operating. The Principal Commissioner of Income Tax (PCIT) issued a notice under section 263, questioning the treatment of foreign exchange loss as operating. The PCIT directed the TPO to recompute the Arm's Length Price (ALP) of international transactions regarding foreign exchange loss.

Issue 2: Jurisdiction under section 263 of the Income Tax Act:
The appellant contended that since the TPO had already conducted an inquiry into the matter, the PCIT could not invoke jurisdiction under section 263. The appellant argued that the twin conditions under section 263 were satisfied, and therefore, there was no scope for revision. However, the PCIT proceeded with the proceedings under section 263, emphasizing the need to consider the consistent treatment of foreign exchange loss by the appellant in previous years.

Issue 3: Consistency in accounting treatment by the assessee:
The CIT (IT & TP) observed that except for the assessment year 2017-18, the appellant consistently treated foreign exchange loss as operating in other years. The CIT noted that the TPO failed to consider crucial tests for determining the nature of foreign exchange gain or loss. The CIT found that the appellant selectively treated foreign exchange loss as operating or non-operating to suit its benefit. The tribunal concluded that the failure to consider the consistent treatment of foreign exchange loss by the appellant in different years amounted to an error prejudicial to the interest of revenue. The tribunal dismissed the appeal, upholding the direction to the TPO to reconsider the issue after affording the appellant an opportunity to be heard.

In conclusion, the appellate tribunal upheld the direction to recompute the ALP of international transactions related to foreign exchange loss, emphasizing the importance of consistency in accounting treatment and the need to consider all relevant facts for accurate decision-making.