2015 (3) TMI 140 - AT - Income Tax

Treatment of foreign exchange fluctuation loss as operating cost - Held that - The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. When we read the ratio of the case of Sutlej Cotton (SC)(1978 (9) TMI 1 - SUPREME Court) in juxtaposition to that of the Special Bench in case of Prakash I Shah (2008 (8) TMI 387 - ITAT BOMBAY-K ), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. - Decided in favour of assessee. Assessee claiming that difference in the foreign exchange rate of Euro beyond a particular point is abnormal and hence the same be not considered as recurring expense - Held that - This contention is devoid of any merits because of the obvious reason that fluctuation in the foreign currency is across the board and is applicable not only to the assessee but to the comparables as well. It was fairly admitted that in some of the comparable cases, there is a figure of forex gain/loss. This shows that such change in the foreign exchange rate is not assessee-specific so as to warrant any adjustment. As it is applicable to one and all, there can be no case for treating some part of the forex loss as normal and the other as abnormal so as to warrant exclusion of the second part from operating cost by treating it as an abnormal loss. It is further relevant to note that the assessee earned forex gain of around 18.40 lac under the Trading segment . As such, the contention of the assessee claiming exclusion of some part of the forex loss from the ambit of operating expenses on the basis of the abnormal loss theory, is not sustainable. CIT(A) has taken an unimpeachable view by considering the forex loss of ₹ 50.04 lac as a part of operating cost. - Decided against assessee. Denial of working capital adjustment - Held that - The assessee cannot be deprived of the working capital adjustment, if it is rightly due. The claim of the assessee for working capital adjustment cannot be rejected at the outset. The impugned order on this issue is set aside and the matter is sent back to the AO/TPO for verifying the calculation so made by the assessee in support of its working capital adjustment, and then allow it as per law, if available, after allowing a reasonable opportunity of being heard to the assessee. - decided in favour of assessee for statistical purposes. Addition on account of forex loss - CIT(A) delted the addition - Held that - No infirmity in the impugned order on this score because such a claim is permissible as per the judgment of the Hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. (1978 (9) TMI 1 - SUPREME Court) ) and the Special Bench order in the case of Oil and Natural Gas Corpn. Ltd. vs. DCIT 2002 (8) TMI 802 - ITAT DELHI - Decided against revenue Addition u/s 68 - CIT(A) deleted the addition - Held that - Assessee furnished additional evidence before the ld. CIT(A) in support of the deletion of the addition. Such additional evidence was sent to the AO for comments. The AO simply objected to the admission of additional evidence without controverting the position stated in such evidence. It is noticed that a sum of ₹ 9,25,430/- was received as advance from Pioneer Agro Exports Ltd. during financial years 2000-01 and 2001-02. Since the credit in respect of this amount did not generate during the year, there can be no question of the applicability of section 68 of the Act to such a credit. As regards the second amount of ₹ 6,50,000/- from M/s Spic Pharmaceutical Division, it is seen that the assessee received it as an advance which was adjusted against the invoice raised in August, 2003. In view of these circumstances, we are of the considered opinion that the ld. CIT (A) was fully justified in deleting this addition. - Decided against revenue

Summary

Issues Involved:
1. Treatment of foreign exchange fluctuation loss as operating cost.
2. Denial of working capital adjustment.
3. Deletion of addition on account of forex loss.
4. Deletion of addition under Section 68 of the Income Tax Act.

Detailed Analysis:

1. Treatment of Foreign Exchange Fluctuation Loss as Operating Cost:
The primary issue is whether the foreign exchange fluctuation loss should be considered as an operating cost. The assessee, engaged in rendering services and marketing of separators and decanters, argued that the forex loss of Rs. 50.04 lac should be treated as a non-operating expense and excluded from operating costs. The Transfer Pricing Officer (TPO) disagreed, including it as part of operating costs, reducing the operating profit margin to 1.42%, leading to a transfer pricing adjustment of Rs. 53.55 lac. The CIT(A) upheld this view, increasing the adjustment to Rs. 84.15 lac.

The tribunal held that forex gain or loss is inherently part of the price of import or export transactions, referencing the Special Bench decision in ACIT vs. Prakash I. Shah and the Supreme Court decision in Sutlej Cotton Mills Ltd. vs. CIT. It concluded that forex loss is an operating cost as it is a direct outcome of purchase transactions. The argument that forex loss due to an extraordinary increase in Euro rates should be excluded was rejected, as forex loss is a recurring and inherent part of business operations, not an extraordinary item.

2. Denial of Working Capital Adjustment:
The assessee requested a working capital adjustment, which was not initially claimed before the TPO but raised before the CIT(A). The CIT(A) refused to admit this additional ground. The tribunal noted that the assessment year 2003-04 was the second year of transfer pricing provisions, and the rightful due should not be denied due to technicalities. Citing decisions in Agilent Technologies International Pvt. Ltd. vs. DCIT and Mercer Consulting (India) Pvt. Ltd. vs. DCIT, the tribunal remanded the matter to the AO/TPO for verification and allowance of the working capital adjustment if applicable.

3. Deletion of Addition on Account of Forex Loss:
The AO disallowed Rs. 18.96 lac of the claimed Rs. 31.64 lac forex loss, considering it contingent as it related to unliquidated foreign trade liability. The CIT(A) deleted this addition. The tribunal upheld the deletion, referencing the Supreme Court judgment in Sutlej Cotton Mills Ltd. and the Special Bench decision in Oil and Natural Gas Corpn. Ltd. vs. DCIT, which permit such claims.

4. Deletion of Addition under Section 68 of the Income Tax Act:
The AO added Rs. 15,75,430/- under Section 68 due to lack of confirmations for sundry creditors. The CIT(A) deleted the addition after considering additional evidence that the AO did not refute. The tribunal noted that the credits from Pioneer Agro Exports Ltd. and Spic Pharmaceutical Division were advances received in earlier financial years and adjusted against invoices, thus not attracting Section 68. The tribunal upheld the deletion of these additions.

Conclusion:
The tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The order was pronounced on 18.07.2014.