2. Some concern may decide to take the risk of hedging and make a profit out of it. Those taxpayers who have incurred foreign exchange gain appeal that it should be considered operating. When an overall foreign loss offsets U.S. taxable income, a foreign loss account is created or … and Trilogy E Business Software India (P.) Ltd. v. Dy. This company was selected by the TPO and objected by the assessee for inclusion in the list of comparables on the ground that it is functionally different as it is engaged in the business of BPO, banking, finance, insurance domain. He submitted that the Honâble Supreme Court has held in the case of Rameshlal Sanwarmal (122 ITR 162) has held that the error committed in earlier decision could be corrected in a later decision. For instance, interest income and expenses aren't included in operating income, ... items of income or loss from foreign exchange impacts also get … The other part is definitely non-operating – the part arising from nominal forex gain/loss calculated by MTM method on 31st of March each year. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. Vs. Dy.CIT [TS-715-ITAT-2011(HYD)], 6) M/s CSR India Pvt. Basic Materials . The ITO [TS-68-ITAT-2013(Bang)-TP], 7) M/s S Narendra vs. Addl CIT [ITA No. Hence both the companies have huge brand presence. 16. It can … Reserves and provisions will be in … The ITO [TS-68-ITAT-2013(Bang)-TP], 7) M/s S Narendra vs. Addl CIT [ITA No. Rules, 1962 give various definitions for the purpose of safe harbour. (supra) is distinguishable. In the light of this, the merits of taking foreign exchange gain/loss as non-operating are as under: 1. Expenses are revenue, and not capital, in nature. 21. CIT  88 taxmann.com 286 (Delhi – Tri. However, specific services rendered by both the companies would show that the functions performed by the assessee company is different from the functions performed by M/s Infosys BPO Ltd and M/s TCS E-serve Ltd. Hence the brand value held by M/s Hewllett-Packard may be helpful in marketing of hardware and IT solutions, i.e., it cannot be said that their brand value would command a premium in respect of back end BPO support services. A part of forex gain/loss is definitely operating – the part that arises from sale/purchase transactions. 24. Even the Hon’ble DRP confirmed the findings of the TPO. This contention was rejected by the TPO by holding that it is engaged in BPO, business of banking, finance, insurance domain, which are purely in the nature of ITES. India Branch vs. ADIT [TS-335-ITAT-2014(Bang)-TP]. It is a strategic decision, and leads to profit or loss independent of the business. Quick links. TCS E-Serve International Ltd. and M/s. If a taxpayer has made forex gain, TPO’s stand is disadvantageous to taxpayer and it appeals in appellate forums. ), Samsung Heavy Industries India (P.) Ltd. v. Dy. It has to be noted that the TPO cannot differentiate between ‘real’ and ‘nominal’ forex items, because such details are not available for comparables. Foreign currency exchange losses are unusual charges that often don’t appear directly on the income statement because they are bundled in other line items. In our view, the decision rendered by the Honâble High Court and various benches of Tribunal holding that the companies having high brand value cannot be considered as comparable companies can be conveniently applied to the year under consideration also. The learned counsel for the Assessee pointed out that it is impossible to carry out such an exercise. The assessee has filed this appeal challenging the assessment order dated 23.01.2017 passed by the assessing officer u/s 143(3) r.w.s 144C of the Income-tax Act,1961 [‘the Act’ for short] for assessment year 2012-13 in pursuance of directions given by Ld Dispute Resolution Panel (DRP). 39. The Foreign currency guide contains a summary of the framework for accounting for foreign currency matters, including the accounting for foreign currency transactions and translating the financial statements of foreign entities. ), iii. We have also noticed that M/s Infosys BPO Ltd is being consistently excluded in the assesseeâs own case in the earlier years. There is no doubt about it. That this non-issue has become an issue is both tragicomic and paradoxical. As noticed earlier, the assessee seeks exclusion of M/s Infosys BPO Ltd and M/s TCS E-Serve Limited. The learned counsel for the Assessee therefore submitted that profit arising from comparable transaction will not be materially affected by adopting the foreign exchange gain as reflected in the accounts of the comparable companies because the terms of credit are almost identical in the line of business of SWD Services and ITES. Ltd. vs. ITO [TS-730-ITAT-2012(HYD)-TP], 12) M/s Capital IQ Information Systems (India) Pvt. After adding negative working capital adjustment of -0.06%, the adjusted margin was arrived at by the TPO at 28.17%. Kenexa Technologies Pvt. Foreign exchange risk has been high on the agenda of CFOs of MNCs for many years. Logical exposition: There are two components to a Forex gain or loss. He submitted that there is close connection between M/s TCS E-serve and Tata Consultancy Services Ltd, which has got high brand value. We have considered the rival submissions and are of the view that in the light of Rule 10B(3) of the Rules and the business cycle in the relevant business, the comparability will not be materially affected if the foreign exchange gain is considered as reflected in the accounts of the comparable companies as available in public domain. 3. 6839/Mum/2012], 8) M/s Sumit Diamond (India) Pvt. Forex gain/loss is part of the international transaction. 604 it is stated as under. While working out the margin, the assessing officer treated the foreign exchange gain as non-operating in nature. Various appellate forums have consistently ruled that foreign exchange gain/loss are operating in nature. It is clear that forex is not part of business operations in case of every concern. At the onset it has to be clarified that ‘operating income’ is not the same as ‘revenue income’. Accordingly, he made transfer pricing adjustment of Rs.57,69,82,545/-. Step 3 – calculate the foreign exchange gain/loss at the year-end 31 March 2017 . There should not have any doubt that the âbrand valueâ possessed by a company has definite role to play in fixing the pricing of product/services, but it may have effect only in the field, in which it possesses expertise. The Ld D.R submitted that the âservice deliveryâ is more important than the brand value. In its decision dated 29th August, 2018 the Court referred to the earlier decision dated 26th February, 2018 which again pertained to AY 2010-2011. noted as under: “48. The Ld D.R submitted that both the assessee and Infosys BPO Ltd fall under the category of companies providing ITES services in the form of business process outsourcing, i.e., both the companies are providing solutions to business processes outsourced to them. the He submitted that the assessee herein is part of Hewlett-Packard Group. With the expansion of the global economy and diverse influences on exchange rates – such as the current climate of economic uncertainty and fear of terrorism in many countries – foreign exchange risk is likely to be a key consideration for most companies trading across borders in years to come. Ltd. vs. DCIT [TS-522-ITAT-2011(Bang)], 14) M/s SAP Labs India (P) Ltd. vs. ACIT [2011, 44 SOT 156, Bang]. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. It was held that foreign exchange gain had to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies. There was some litigation on whether nominal forex loss (determined by MTM method) is revenue expense, but the issue is more or less settled now. All other issues arising on account of TP adjustments were not argued and therefore treated as not pressed for adjudication.â. The turnover of both the companies are also comparable, i.e., the turnover of the assessee company was Rs.1130 crores, while the turnover of M/s Infosys BPO Ltd was Rs.1530 crores. Clause (j) of Rule 10TA defines “operating expense” and states that operating expense does not include (i) interest expense, (ii) provision for unascertained liabilities, (iii) pre-operating expenses, (iv) loss arising on account of foreign currency fluctuations, (v) extraordinary expenses, (vi) loss on transfer of assets or investments, (vii) expenses on account of income-tax, and (viii) other expenses not relating to normal operations of the assessee. This idea is often superimposed on definitions of operating/non-operating. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under section 260-A of the Act.”. OECD’s Unified-Approach for taxing digital economy – Can ALP and formulary apportionment co-exist? Is Tran credit/ITC recovery mechanism defective under GST? The Revenue’s appeal against the same Assessee for AY 2011-2012 against another order of the ITAT excluding TCS E-Serve International Limited, Infosys BPO Limited from comparables met the same fate. Others may not. All of these decisions pertained to AY 2010-2011. 17. However, forex gain/loss are not differentiated on what part is real and what part is nominal in the annual report of comparables. Foreign exchange risk has been high on the agenda of CFOs of MNCs for many years. Their appeal is instantly accepted. M/s TCS E Serve Ltd was considered by the co-ordinate bench in the case of M/s Arctern Consulting Pvt Ltd (IT(TP)A No.352/Bang/2017 dated 15.10.2019 relating to AY 2012-13) and it was held as under:-, â10. Ltd. vs. DCIT [TS-395-ITAT-2012(Bang)], 11) M/s Brigade Global Services Pvt. Real gain/loss may arise out of hedging or time lag between transaction and payment, and nominal forex gain/loss arises on 31st March of the year by using Marked to Market(MTM) method of accounting. (b) Treatment of foreign exchange gain/loss as operating income/expenses or not. Therefore respectfully following the decision of the ITAT Bangalore in the case of SAP Labs India (P.) Ltd. (supra), we hold that the DRP was justified in directing the AO to IT(TP)A No. There is no doubt about it. Hence it does not appeal against the stand in court. The issue arose for consideration was whether foreign exchange fluctuation gain/loss shouldÂ form part of operating income/loss or not.Â It was held that foreign exchange gain had to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies.Â Accordingly, foreign exchange fluctuation gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee as well as of the comparable companies. “2. A reference may next be made to the decision in Evalueserve Sez (Gurgaon) (P.) Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services (P.) Ltd. (supra). He submitted that above consolidated profits also include profits of Infosys BPO Ltd as well. 13. In the preceding year, the assessee had incurred foreign exchange fluctuation loss and exclusion of the same resulted in increase of operating margin. When an overall foreign loss offsets U.S. taxable income, a foreign loss account is created or … Vs. Dy.CIT [TS-390-ITAT-2014(HYD)-TP]. It differs widely from business to business and depends on pending foreign creditors and debtors. He submitted that the assessee is providing services only to its group companies and hence the effect of âbrand valueâ will not be there. 2) M/s. The Ld D.R submitted that the impact of brand value was not examined in any of the earlier decisions rendered by the Tribunal in the assesseeâs own case. As observed by this Court in its decision in CIT v. Actis Global Service (P.) Ltd. [IT Appeal No. HC:Share-transfer to subsidiary for corporate restructuring, absent voluntariness, not gift; Upholds capital gains tax, SC:State's 'Administrative lethargy' in notifying Electricity duty rebate violates 'doctrine of promissory estoppel', HC:Transaction non-reference while seeking TPO-reference approval not fatal when CASS-selection reason specified, ITAT:Inter-unit transactions between eligible units u/s. He submitted that the nature of transaction is more relevant than the stand taken by the assessee. TCS E-Serve has a turnover of Rs. 11.3 We have heard rival submissions and perused material on record. Your Company is an integral part of the Tata Consultancy Services’ (TCS) strategy to build on its ‘Full Services Offerings’ that offer global customers an integrated portfolio of services ranging from IT services to BPO services. and Equant Solutions India (P.) Ltd. v. Dy. 11. The DRP was of the view that the assessee has to be consistent in the approach in this regard. Respectfully following the aforesaid decision, we hold that TCS E Service Ltd., should be excluded from the list of comparable companies.â. A notional forex gain/loss also arises on 31st day of March (year-end date) when Marked-to-Market method is used to make accounting entries. Rules, 1962 give various definitions for the purpose of safe harbour. The author is an officer of the Indian Revenue Service. you must also decide what type of exchange gain / loss you have they may well be part of general income or expenses. The rules for safe harbour were formulated by the Rangachary Committee and definitions for safe harbour are same as that of TP, since safe harbour is nothing but a safety net for a taxpayer above a specified TNMM margin. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. Those taxpayers who have incurred foreign exchange loss benefit from the revenue’s stand. 26. Others may not. Revenue takes inspiration from Rule 10TA and considers forex fluctuation as non-operating. The Ld A.R submitted that, under broad classification, both the companies would fall under ITES segment. TPO recomputed the margin of the assessee by excluding interest income and non-operating income and also reducing the expenditure. A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency, and that currency fluctuates relative to their home currency. It is also submitted that this company owns IPR and brand and incurs advertisement and marketing expenses on brand building. It is, in a way, speculative. Accordingly, we restore this matter to the file of the AO/TPO. In a recent case it was held that the foreign exchange fluctuation loss shall be considered as a part of the Operating Cost. Ltd. vs. DCIT [TS-414-ITAT-2012(HYD)], 13) M/s Trilogy E Business Software India Pvt. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. We are conscious of the fact that we are dealing with the case relating to AY 2012-. Ltd. [ITA No.617/Del/2014]. As far as TCS E Service Ltd., is concerned, the comparability of this company was considered by this Tribunal in the case of Zyme Solutions Ltd., in its order dated 16.11.2018 as follows:-. India Branch vs. ADIT [TS-335-ITAT-2014(Bang)-TP]. Overall foreign loss. Since the appellant company is into low end BPO, it cannot be compared with KPO service provider. He submitted that both the companies are operating worldwide. Therefore, in light of the above, this ground of the Revenue is liable to be dismissed.”, 14. 27. I would call this account Gain (Loss) on Foreign Exchange. CIT vs. M/s Sanvih Info Group P Ltd (ITA 420/2019 dated 16.05.2019)(Delhi), the Honâble Delhi High Court referred âM/s Infosys Ltdâ as giant corporation. Rather, removing forex enhances comparability. A concern may incur foreign exchange gain or loss in the course of its normal sale/purchase transactions with parties located outside the country. Exchange differences arising on monetary items are reported in profit or loss in the period, with one exception. Further there was no segmental bifurcation between the transaction processing and technical services. 19. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. The above accounting treatment was for the group financial statements. 417 of 2016, dated 5-8-2016]”Size and Scale of TCS’s operation makes it an inapposite comparable vis-a- vis the Petitioner.” As already pointed out earlier there is a closer comparison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs. 19 crores as contribution towards brand equity. We notice that the main thrust of Ld D.Râs contention was that the HP group is also possessing equal brand value, that the turnover of the assessee and that of M/s Infosys Ltd falls under the same bracket, that there is no evidence to show that the comparable companies have capitalised its brand value, that both the companies are rendering ITES services only. Reference was again made to the decision in BC Management Services Ltd. 23. He submitted that all the above said contentions would apply to TCS e-serve Ltd also. The difference is a forex loss. . A one-time item is a gain, loss or expense on the income statement that is nonrecurring in nature and therefore not considered part of ongoing operations. Foreign exchange gain and loss have two components: real and nominal. Rule 10TA of I.T. Accordingly it was submitted that this companyâs functions are different from that of the assessee company. Ltd. vs. DCIT [TS-395-ITAT-2012(Bang)], 11) M/s Brigade Global Services Pvt. Vs. Dy.CIT [TS-390-ITAT-2014(HYD)-TP]. Ltd. vs. DCIT [TS-522-ITAT-2011(Bang)], 14) M/s SAP Labs India (P) Ltd. vs. ACIT [2011, 44 SOT 156, Bang]. 5) M/s. 20. 26. There is no direct correlation between operating income/expenses and revenue income/expenses. Ltd. vs. DCIT [TS-758-ITAT-2012(Bang)-TP], 10) M/s Trilogy E-Business Software India Pvt. The Ld D.R submitted that the TPO had treated the foreign exchange fluctuation loss incurred by the assessee in the immediately preceding year as non-operating in nature and the assessee did not object to the same. This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s. 11.2 On the other hand, ld. Expenses are not a contingent liability, i.e. Swiss Re Global Business Solutions India (P.) Ltd. FS-307-ITAT- 2017(Bang), i. XL Health Corporation India (P.) Ltd. (supra), ii. 352/Bang/2017 operating revenue or loss. Accordingly, we direct the AO/TPO to exclude both M/s Infosys BPO Ltd and M/s TCS E serve Ltd from final list of comparables. He submitted that this company is engaged in KPO services and there is no difference between KPO and ITES. In view of the aforesaid decision, we are of the view that the foreign exchange gain has to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies. Though the assessee has raised many grounds, at the time of hearing the Ld A.R pressed the grounds relating to the issue of, (a) Exclusion of two comparable companies viz., M/s Infosys BPO Ltd and M/s TCS E-Serve Limited and. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. To this extent the decision rendered by the Bangalore Bench of ITAT in the case of Commonscope Networks (India) Pvt.Ltd. The Ld A.R, in reply, submitted that, in various decisions rendered by High Courts, it has been held that the brand value plays a significant role. 5) M/s. Overall foreign loss. If the Gain/Loss on Exchange account were not calculated, then your “Net Income” would not fluctuate with exchange rates in the same way that your foreign-currency valued assets (like cash and receivables) or liabilities (payables or loans) did, and the Balance Sheet would go “out of balance.” For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. Conclusion: Foreign exchange fluctuation gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee as well as of the comparable companies. The very word “comparable” means that the Group of Entities should be in a homogeneous Group. Revenue takes inspiration from Rule 10TA and considers forex fluctuation as non-operating. This company did not disclose BPO services as separate segment. 3) DCIT vs. M/s. Without careful footnotes research, investors would never know that these currency devaluation charges distort GAAP numbers by lowering operating earnings. The TPO recomputed the margin of the assessee by excluding interest income and non-operating income and also reducing the expenditure. 6. We appreciate this distinction brought out by Ld A.R. Rule 10B(3) reads thus: “(3) An uncontrolled transaction shall be comparable to an international transaction if–, (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or, (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”. Safe harbour definitions of the government clearly portray the rules governing TP audit. It is wise to make a consistent assumption across the board: between taxpayers, TP auditors, and appellate forums. Ltd. vs. ACIT [TS-220-ITAT-2014(DEL)-TP], 2) M/s. An expense is 'incurred' when the legal liability to pay the expenses have arisen, regardless of the date of actual payment of the money. 25. 18. It was submitted that this company has been excluded in various decisions. Company A will have to work out the foreign exchange gain or loss as follows: This gain is taken to the profit and loss account as a credit (i.e. The main reason why the DRP considered foreign exchange gain should not be treated as a part of the operating profit was due to the fact that the assessee in the preceding Assessment year did not consider foreign exchange loss as operating in nature. Hence they are in the nature of BPO services only, while M/s Infosys BPO Ltd and M/s TCS E serve Ltd are providing variety of other services. 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