2017 (2) TMI 809 - AT - Income Tax

Foreign exchange gain as part of operating revenue - computation of operating margin of the assessee-company - whether such foreign exchange gain is in respect of the turnover of the present year or for turnover of an earlier year because the bench felt that if the said gain is not on account of turnover of the present year then, such gain cannot be part of operating profit of the present year to work out the operating profit margin percentage? - Held that - This matter should go back to the file of the ld. CIT (A) for a fresh decision after examining this aspect as to whether such foreign exchange gain is in respect of turnover of the present year or of an earlier year because in our considered opinion, the foreign exchange gain is no doubt an operating profit of the assessee-company if the same is on account of collection of sale proceeds of the assessee-company but for the purpose of computing the ALP, such foreign exchange gain cannot be added in operating profit of the assessee-company if such gain is arising on account of turnover of an earlier year because for the purpose of computing the ALP, operating profit margin over the turnover has to be worked out and since the turnover of the present year is not inclusive of turnover of earlier year for which the exchange fluctuation gain is arising, such gain also cannot be taken into account for computing the operating profit percentage of the present year in order to finalise ALP and since these details are not available on record as to whether the foreign exchange fluctuation gain in the present case is in respect of turnover of the present year or of an earlier year, we restore the matter back to the file of the AO/TPO for fresh decision Exclusion of one comparable company i.e. Sat Investeck Ltd - Held that - This issue should be restored back to the file of TPO for fresh decision after examining the RPT percentage of this company because, as per the annual report of this company available in the paper book, the RPT percentage of this company is much higher than the RPT percentage being accepted by the Tribunal i.e. 15% but there is no finding of any of the authorities below on this aspect. Hence, on his aspect, we set aside the order of ld. CT (A) and restore the matter back to the file of the AO/TPO to decide the issue afresh 5% standard deduction allowed by ld. CIT (A), it was fairly conceded by the ld. AR of the assessee that this issue has to be decided in favour of the revenue and against the assessee in view of subsequent amendment in the provisions of sec. 92C of the IT Act, 1961. Accordingly, we decide this issue in favour of the revenue Computation of deduction 10A - Held that - The total turnover is sum total of domestic turnover and export turnover and therefore, if an amount is reduced from export turnover then the total turnover also goes down automatically by the same amount.

Issues Involved:
1. Inclusion of foreign exchange gains as part of operating revenues.
2. Exclusion of Sat Investeck Ltd as a comparable company.
3. Application of +/- 5% standard deduction in computing the arm's length price (ALP).
4. Delay in filing the cross objection by the assessee.
5. Exclusion of telecommunication and travel expenses from total turnover.

Issue-wise Detailed Analysis:

1. Inclusion of Foreign Exchange Gains as Part of Operating Revenues:
The revenue contended that the CIT(A) erred in including foreign exchange gains as part of operating revenues, arguing that such gains are dependent on external factors and not related to business operations. The tribunal noted that the foreign exchange gain should be considered as operating profit if it arises from the collection of sale proceeds of the current year's turnover. However, if the gain is from an earlier year’s turnover, it should not be included in the operating profit for the current year. The matter was remanded back to the CIT(A) for fresh examination to determine if the foreign exchange gain pertains to the current year’s turnover or an earlier year.

2. Exclusion of Sat Investeck Ltd as a Comparable Company:
The revenue challenged the CIT(A)'s decision to exclude Sat Investeck Ltd as a comparable, arguing that the company earned abnormal profits without any peculiar economic circumstances. The tribunal found merit in the assessee's claim that the Related Party Transactions (RPT) percentage of Sat Investeck Ltd was higher than the acceptable limit of 15%. Since there was no finding on this aspect by the authorities below, the matter was remanded back to the AO/TPO for fresh decision after examining the RPT percentage. If the RPT percentage exceeded 15%, Sat Investeck Ltd should be excluded as a comparable.

3. Application of +/- 5% Standard Deduction in Computing the ALP:
The revenue argued that the CIT(A) erred in allowing a +/- 5% standard deduction for computing the ALP, despite a subsequent amendment clarifying that such a deduction should not be allowed if the price charged by the assessee falls beyond the +/- 5% range. The tribunal agreed with the revenue, noting that the amendment to Section 92C was clarificatory and applicable retrospectively. Consequently, the tribunal decided this issue in favor of the revenue, disallowing the +/- 5% standard deduction.

4. Delay in Filing the Cross Objection by the Assessee:
The assessee filed a cross objection with a delay of 1760 days, attributing the delay to amendments in Section 92C and subsequent legal interpretations. The tribunal found the explanation for the delay up to the Special Bench decision in 2013 acceptable but noted that there was no reasonable explanation for the remaining delay of 951 days. Consequently, the tribunal did not condone the delay and dismissed the cross objection as un-admitted.

5. Exclusion of Telecommunication and Travel Expenses from Total Turnover:
For the assessment year 2005-06, the revenue contended that telecommunication and travel expenses should not be excluded from the total turnover for computing the deduction under Section 10A. The tribunal referred to the Karnataka High Court's judgment in Tata Elxsi Ltd., which held that if an amount is reduced from export turnover, it should also be reduced from total turnover. Following this precedent, the tribunal upheld the CIT(A)'s decision to exclude these expenses from the total turnover.

Conclusion:
The tribunal allowed the revenue's appeals for the assessment years 2004-05 and 2005-06 partly, remanding some issues for fresh examination and deciding others in favor of the revenue. The assessee's cross objection was dismissed due to the unexplained delay in filing.

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