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TMI Blog2015 (9) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 4,98,20,2990/-. The Ld. Assessing Officer referred the assessee's case U/s.92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP). 4. The Ld. TPO in his order dated 23.01.2013 observed that the assessee had not included forex loss of Rs. 3,51,11,952/- pertaining to import of raw materials as operating expenses in its computation. The Ld. TPO further observed that as per OECD guidelines Chapter-II, page-85 forex loss/gain pertaining to revenue transaction has to be included in the margin calculation. The Ld. TPO relied in the decision of the case of SAP Labs (TS-61-ITAT-2010), M/s. Four Soft (TS-518-ITAT-2011-HYD) & Trilogy Ebusiness (TS-455-1-ITAT-2011-Bang) wherein it was held that forex loss/gains should be considered as a part of operating income for the purpose of PLI computation because it is an integral part of sale proceeds. Therefore, the Ld. TPO included the forex loss while computing the revised margin of the assessee company. The Ld. Assessing Officer adopted the same in his draft assessment order. The assessee filed its objection before the Ld.DRP. The assessee had stated before the Ld.DRP that it had incurred forex loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 952/-which is a revenue expenditure and not an operating expenditure. v) Operating expenditure is expenditure incurred by the assessee in the course of the normal business operations and capable of being controlled by the assessee. Loss due to foreign exchange fluctuation is resulting from global factors affecting the respective currencies which are beyond the control of the assessee. vi) The Institute of Cost Accountancy of India in its Generally Accepted Cost Accounting Principles (GACAP) has stated that exchange losses or gains incurred after the purchase transaction is completed is not be treated as material cost but it is to be treated as financial cost. vii) Reliance was also placed in the decision of the Delhi Bench of the Tribunal in the case of Sumitomo Corporation of India P Ltd Vs. ACIT in ITA No. 2307/Del/2009 wherein it was held that interest expenses is incurred for the purpose of business which is allowable deduction against business income but the same does not assume the character of operating expenses as it is not concerned with the hub activity of the business. Further in the case of Honda Trading Car India Pvt Ltd. [TS-135-ITAT-2013(Del.)-TP], the Delhi Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is made clear that profits or loss arising out of foreign exchange fluctuations ought to be taken into consideration while arriving at the operation cost in transfer pricing matters. 1. M/s. Westfalia Separator India Pvt. Ltd. vs. ACIT [ITA No.4446/Del/2007] 4.1. We have heard the rival submissions and perused the relevant material on record. 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. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Trilogy E-Business had directed that the foreign exchange gain or loss should be considered as operating revenue or cost while computing the operating margin of the asssessee as well as the comparable. The relevant finding of the Tribunal read as follows: "79............................................................................................................ (B) .............................................................................................. As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard.....................". 3.6.1 In conformity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. Useful reference may be made to the decisions of Bombay High Court in the case of Shah Bros. v. CIT, [2003] 259 ITR 741; that of Gujarat High Court in the case of CIT v. Amba Impex [2006] 282 ITR 144 and that of Mumbai ITAT Spl. Bench in the case of Asstt. CIT v. Prakash L. Shah [2008] 306 ITR (AT) 1. In all the above cases, the dominant question considered was the year of deduction on the accepted proposition that the foreign exchange fluctuation gains computed by an assessee in a relevant previous year should be treated as part of the operating income and thereby it would contribute to the operating margin of the assessee-company. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee-company. This contention of the assessee is accepted." Therefore following the decision of the Tribunal and the Special Bench of the Tribunal and for the reasons discussed hereinabove, we hereby hold that profits or loss arising out of foreign exchange fluctuations has to be taken into consideration while arriving at the ope ..... 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