DCIT, CHENNAI V. Infac India Pvt. Ltd., Padappai

ITA 983/CHNY/2014

• Counselvise Citation: 98321714 RSA 2014
• Duration Of Justice: 1 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 21-04-2014
• Court: TRIBUNAL
• Department Lawyers: JOE SEBASTIANCITD R
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Business income; Transfer pricing; Bad and doubtful debts; Capital receipt; Revenue expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.983 /MDS./2014 ( !' #' / ASSESSMENT YEAR :2009-10) THE DY. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), ROOM NO.513, NEW BLOCK, M.G.ROAD, CHENNAI 600 034. VS. M/S.INFAC INDIA PVT. LTD., 113,ELLAIMMAN KOIL STREET, PADAPPAI, 601 301. PAN AADCS 4890 C ( / APPELLANT ) ( / RESPONDENT ) $% & ' / APPELLANT BY : MR.JOE SEBASTIAN,CIT,D.R ()$% & ' / RESPONDENT BY : MR.S.RAGHUNATHAN,ADVOCATE * + & ,- / DATE OF HEARING : 27.05.2015 .# & ,- /DATE OF PRONOUNCEMENT : 17.07.2015 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED BY T HE DIRECTION OF THE DISPUTE RESOLUTION PANEL(DRP), CHENNAI DATED 20.12.2013 IN ITA NO.983 /MDS/2014 2 F.NO.DRP/CHE/21/2012-13 PASSED UNDER SEC.144C(5) RE AD WITH SECTION 144C(8) OF THE ACT. 2. THE REVENUE HAS RAISED THREE ELABORATE GROUNDS IN ITS APPEAL; HOWEVER THE CRUX OF THE ISSUE IS THAT THE REVENUE I S AGGRIEVED BY THE DIRECTION OF THE DRP WHO HAD DIRECTED THE TPO TO EX CLUDE THE FOREX LOSS FROM THE COMPUTATION OF OPERATING COST OF THE ASSESSEE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURING CONTROL C ABLE, ANTENNA AND FEEDER CABLE AND IGNITION CABLE ETC., FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 28.09.2009 ADMITTING ITS INCOME AS ` 4,98,20,2990/-. THE LD. ASSESSING OFFICER REFERRED THE ASSESSEES 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 OBSE RVED THAT THE ASSESSEE HAD NOT INCLUDED FOREX LOSS OF ` 3,51,11,952/- PERTAINING TO IMPORT OF RAW MATERIALS AS OPERATING EXPENSES IN IT S COMPUTATION. THE ITA NO.983 /MDS/2014 3 LD. TPO FURTHER OBSERVED THAT AS PER OECD GUIDELINE S CHAPTER-II, PAGE-85 FOREX LOSS/GAIN PERTAINING TO REVENUE TRANS ACTION HAS TO BE INCLUDED IN THE MARGIN CALCULATION. THE LD.TPO RELI ED 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-2 011-BANG) WHEREIN IT WAS HELD THAT FOREX LOSS/GAINS SHOULD BE CONSIDERED AS A PART OF OPERATING INCOME FOR THE PURPOSE OF PLI COM PUTATION 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 ADOPTE D THE SAME IN HIS DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED ITS OBJECTION BEFORE THE LD.DRP. THE ASSESSEE HAD STATED BEFORE THE LD.D RP THAT IT HAD INCURRED FOREX LOSS TO THE TUNE OF ` 3,51,11,952/- PERTAINING TO THE PURCHASE OF RAW MATERIALS AND IT HAS TO BE EXCLUDED WHILE DETERMINING THE OPERATING PROFIT. RELIANCE WAS PLAC ED IN THE DECISION OF THE CASE DHL EXPRESS (INDIA) PVT LTD ITA NO.73 60/MUM/2010 FOR THE ASSESSMENT YEAR 2006-07 WHEREIN THE TRIBUNAL HE LD THAT EXCHANGE FLUCTUATION DO NOT FORM PART OF THE OPERAT IONAL INCOME BECAUSE THESE ITEMS HAVE NOTHING TO DO WITH THE MAI N OPERATION OF ITA NO.983 /MDS/2014 4 THE ASSESSEE. THE LD.DRP ACCEPTED THE CONTENTION OF THE ASSESSEE AND DIRECTED THE LD.TPO TO EXCLUDE FOREIGN EXCHANGE LOSS/GAIN WHILE COMPUTING THE OPERATING PROFIT MARGIN OF THE ASSESS EE. AGGRIEVED BY THE DIRECTION OF THE LD. DRP, THE ASSESSEE IS NOW I N APPEAL BEFORE US. 5. BEFORE US LD. D.R SUBMITTED THAT THE PROFIT/LOS S ARISING OUT OF FOREIGN EXCHANGE FLUCTUATION TOWARDS PURCHASE AND S ALE ACTIVITIES OF THE ASSESSEE IS REVENUE NATURE AND THEREFORE IT HAS TO BE TAKEN INTO THE ACCOUNT WHILE COMPUTING THE OPERATING COST WHIC H IS IN ACCORDANCE WITH OECD GUIDELINES. THE LD. D.R ALSO P LACED RELIANCE IN THE CASE OF SAP LABS (TS-61-ITAT 2010), M/S.FOUR SOFT (TS-518- ITAT-2011-HYD) & TRILOGY EBUSINESS (TS-455-1-ITAT-2 011-BANG) WHEREIN IT WAS HELD THAT FOREX LOSS/GAINS SHOULD BE CONSIDERED AS A PART OF OPERATING INCOME. IT WAS THEREFORE ARGUED T HAT THE ORDER OF THE LD. A.O MAY BE CONFIRMED. ITA NO.983 /MDS/2014 5 6. THE LD. A.R. SUBMITTED BEFORE US THAT THE DIFFE RENCE IN FOREIGN EXCHANGE RATE IS NOT IN OPERATING EXPENSES DUE TO T HE FOLLOWING REASONS:- I) PROFIT OR LOSS DUE TO FLUCTUATION OF CURRENCY RATE AT THE TIME OF ACTUAL PAYMENT OR RECEIPT ON THE OUTSTANDING AMOUNT , DUE TO PURCHASE OR SALE TRANSACTIONS, WILL AMOUNT TO FINAN CIAL TRANSACTIONS AND NOT AN OPERATING TRANSACTION. II) AS PER ACCOUNTING STANDARD(AS)-11 THE ASSESSE E COMPANY HAD BOOKED COST OF IMPORTED RAW MATERIALS AT THE EX CHANGE RATE PREVALENT ON THE DATE OF TAKING THE MATERIALS IN ST OCK. THE PROFIT OR LOSS RESULTING FROM FOREIGN EXCHANGE FLUCTUATION AT THE TIME OF FINAL SETTLEMENT IS BOOKED AS DIFFERENCE IN EXC HANGE RATE. III) PROFIT OR LOSS RESULTING FROM FLUCTUATION OF CURRENCY RATE WITH RESPECT TO OUTSTANDING SUNDRY CREDITORS TOWARDS IMP ORT OF RAW MATERIALS ARE ALSO RECORDED IN THE BOOS AS DIFFERE NCE IN EXCHANGE RATE. IV) THUS THE ASSESSEE HAD INCURRED A LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION WHICH WAS RECORDED IN ITS BOOK S AS DIFFERENCE IN EXCHANGE RATE AMOUNTING TO ` 3,51,11,952/- ITA NO.983 /MDS/2014 6 WHICH IS A REVENUE EXPENDITURE AND NOT AN OPERATING EXPENDITURE. V) OPERATING EXPENDITURE IS EXPENDITURE INCURRED B Y THE ASSESSEE IN THE COURSE OF THE NORMAL BUSINESS OPERATIONS AND CAPABLE OF BEING CONTROLLED BY THE ASSESSEE. LOSS DUE TO FOREI GN EXCHANGE FLUCTUATION IS RESULTING FROM GLOBAL FACTORS AFFECT ING 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 STA TED THAT EXCHANGE LOSSES OR GAINS INCURRED AFTER THE PURCHAS E TRANSACTION IS COMPLETED IS NOT BE TREATED AS MATER IAL COST BUT IT IS TO BE TREATED AS FINANCIAL COST. VII) RELIANCE WAS ALSO PLACED IN THE DECISION OF T HE 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 HE LD THAT INTEREST EXPENSES IS INCURRED FOR THE PURPOSE OF BU SINESS WHICH IS ALLOWABLE DEDUCTION AGAINST BUSINESS INCOME BUT THE SAME DOES NOT ASSUME THE CHARACTER OF OPERATING EXPENSES AS IT IS ITA NO.983 /MDS/2014 7 NOT CONCERNED WITH THE HUB ACTIVITY OF THE BUSINESS . FURTHER IN THE CASE OF HONDA TRADING CAR INDIA PVT LTD. [TS-13 5-ITAT- 2013(DEL.)-TP], THE DELHI TRIBUNAL HELD THAT FOREIG N EXCHANGE LOSS FOR COMPUTING OPERATING MARGIN SHOULD BE EXCLU DED BECAUSE THEY ARE ABNORMAL LOSS ON ACCOUNT OF HUGE F LUCTUATION IN EXCHANGE RATE. VIII) UNITED NATIONS PRACTICAL MANUAL ON TRANSFER P RICING ON DEVELOPING COMPANY HAS ALSO SUGGESTED THAT THE TERM OPERATING PROFIT INDICATES MORE CLEARLY ON THE OPER ATING ACTIVITIES WHICH ARE RELEVANT FOR TRANSFER PRICING PURPOSES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, CAREFULLY PERUSED THE DECISIONS CITED BY BOTH THE PARTIES AND ARGUMENTS A DVANCED BY THEM. IN TRANSFER PRICING MATTERS, COMPARISONS ARE DRAWN IN REGARD TO TRANSACTIONS MADE BY THE ASSESSEE WITH ITS ASSOCIAT ED ENTERPRISES (AE) AND TRANSACTIONS BETWEEN THE BUSINESS ENTITIES WHO ARE UNRELATED PARTIES. IN THAT CONTEXT OPERATING COST O F THE ASSESSEE COMPANY WHICH HAS TRANSACTIONS WITH ITS AES IS COMP ARED WITH ITA NO.983 /MDS/2014 8 OPERATING COST OF BUSINESS ENTITIES THAT ARE NOT RE LATED TO EACH OTHER. WHILE DETERMINING THE OPERATING COST, VARIOUS FACTO RS COME INTO PLAY, WHICH MAY BE BOTH INTERNAL AS WELL AS EXTERNAL. THE DECISIONS OF EACH ENTITY IN RESPECT OF VARIOUS FACTORS CONTROLLING TH E COST WILL AFFECT THE OPERATING COST. VARIOUS RISK FACTORS ARE TAKEN INT O CONSIDERATION WHILE MAKING FINANCIAL COMMITMENTS, ONE AMONG THEM IS RIS K PERTAINING TO FOREIGN EXCHANGE FLUCTUATIONS. SINCE THE HOLDING PE RIOD WITH RESPECT TO SUNDRY CREDITORS WHO ARE RAW MATERIALS SUPPLIERS OR DEBTORS ARISING OUT OF SALE TRANSACTIONS IS WITH THE MANAGEMENT WHI CH EXPOSES THE ENTITIES TO FOREX RISKS. THEREFORE, THE PROFIT OR L OSS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS WILL BE DIRECTLY ATTR IBUTABLE TO THE OPERATIONAL COST WHICH HAS TO BE ESSENTIALLY TAKEN INTO CONSIDERATION WHILE ARRIVING AT THE OPERATING COST OF THE ENTITIE S WHILE COMPUTING THE PROFIT LEVEL INDICATOR (PLI) IN TRANSFER PRICING MA TTERS. UNLESS THERE IS AN ABNORMAL SITUATION RESULTING IN ABNORMAL FOREX F LUCTUATIONS, THE PROFIT OR LOSS ARISING DUE TO FOREX FLUCTUATIONS CA NNOT BE IGNORED WHILE ARRIVING AT THE OPERATING COST FOR DERIVING THE PLI IN TRANSFER PRICING MATTERS. IT IS PERTINENT TO MENTION HERE THAT IN AR RIVING AT THE OPERATING COST IN TRANSFER PRICING MATTERS THE PRINCIPLES OF COST ACCOUNTING WILL ITA NO.983 /MDS/2014 9 NOT BE STRICTLY APPLICABLE WHERE COST OF FINANCE MA Y BE TREATED DIFFERENTLY. FOR THE AFORE-STATED REASONS WE DO NOT FIND ANY MERIT IN THE ARGUMENTS ADVANCED BY THE LD. A.R. FURTHER IN THE FOLLOWING DECISIONS IT IS MADE CLEAR THAT PROFITS OR LOSS ARI SING OUT OF FOREIGN EXCHANGE FLUCTUATIONS OUGHT TO BE TAKEN INTO CONSID ERATION 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 PERUSE D THE RELEVANT MATERIAL ON RECORD. THE FOREX GAIN OR LOSS IS THE D IFFERENCE 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 TH EN PREVAILING AND THE AMOUNT ACTUALLY PAID OR RECEIVED AT THE RATE OF FOR EIGN EXCHANGE PREVAILING AT THE TIME OF ACTUAL PAYMENT OR RECEIPT. SINCE SUC H 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 RE LATES. 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 FLUCT UATION GAIN IS A PART OF EXPORT TURNOVER. THOUGH SUCH DECISION WAS R ENDERED IN THE CONTEXT OF SECTION 80HHC, BUT THE SAME LOGIC APPLIE S GENERALLY AS WELL. THE ESSENCE OF THE MATTER IS THAT ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY RATE IN RESPECT OF TRANS ACTION FOR IMPORT OR EXPORT OF GOODS IS NOTHING, BUT INHERENT PART OF TH E PRICE OF IMPORT OR THE VALUE OF EXPORT. THE HONBLE SUPREME COURT IN SUTLEJ COTTON MILLS LT D. VS. CIT 116 ITR 1 (SC) HAS HELD THAT : WHERE PROFIT OR LOSS ARISES TO AN ASSSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATIO N IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANO THER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRA DING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. WHEN WE READ THE RATIO OF THE CASE OF SUTLEJ COTTON (SC)(SUPRA) IN JUXTAPO SITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA), TH ERE REMAINS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSA CTION IS NOT ONLY AN ITEM OF REVENUE NATURE, BUT IS, IN FACT, A PART OF THE PRICE OF IMPORT OR ITA NO.983 /MDS/2014 10 VALUE OF EXPORT TRANSACTION, AS THE CASE MAY BE. OP ERATING EXPENSE IS ORDINARILY AN EXPENSE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING ITS NORMAL BUSINESS OPERATIONS. AS THE BUSINESS OF ASSEMBLY DONE BY THE ASSESSEE UNDER THIS SEGMENT IS NOT POSSIBLE WITHOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PURCHASE TRANSACTIONS, WE HAVE NO HESITATION IN HOLDING THAT IT IS AN ITEM OF OPERATING COST. 2. M/S. CISCO SYSTEMS SERVICES B.E. INDIA BRANCH VS. A DIT [ITA(TP) NO.270/BANG/2014], 17. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVA L CONTENTIONS. THE TPO HAD CONSIDERED FOREIGN EXCHANGE FLUCTUATION GAINS TO BE NON-OPERATIONAL IN NATURE. THIS VIEW WAS CONFIRMED BY THE DRP STATING THAT THE FOREIGN EXCHANGE FLUCTUATIONS HAD NOTHING TO DO WITH THE BUSINESS OP ERATIONS OF A TAX PAYER. THE DRP HAD REFUSED TO FOLLOW THE DECISION OF M/S. SAPL AP INDIA (P) LTD (SUPRA). NONE OF THE AUTHORITIES HAVE GIVEN ANY FINDING THAT FOREIGN EXCHANGE FLUCTUATION GAINS WERE RELATABLE TO ANY CAPITAL RECEIPTS OR OUT GOES. ASSESSEE HAD GIVEN A BREAK UP OF FOREIGN EXCHANGE GAIN IN WHICH IT HAD S PECIFICALLY EXCLUDED THE EXCHANGE LOSS ON PURCHASE OF FIXED ASSETS. WE ARE OF THE OPINION THAT THE FOREIGN EXCHANGE FLUCTUATION GAIN ARISING TO THE AS SESSEE ON REALIZATION OF TRADE DEBTORS, PAYMENT TO CREDITORS ETC., WERE NOT HING BUT OPERATIONAL INCOME.. 3. M/S CSR INDIA PVT. LTD. VS. THE ITO [IT(TP)A NO.119 /BANG/2011] 3.6 THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINES S HAD DIRECTED THAT THE FOREIGN EXCHANGE GAIN OR LOSS SHOULD BE CONSIDERED AS OPERA TING 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 CONSIDE RED AS NOT FORMING PART OF THE OPERATING COST, THE REASONING OF THE REVENUE IS THA T SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM INTERNATIONAL TRANSACT ION THOUGH THEY MAY FORM PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE TH EY SHOULD BE EXCLUDED WHILE DETERMINING OPERATING COST. ON THE ABOVE ISSUE WE F IND THAT THE BANGALORE BENCH ITA NO.983 /MDS/2014 11 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 FL UCTUATION GAINS ARE REQUIRED TO BE ADDED TO OPERATING REVENUE. FOLLOWING THE SAM E, THE AO IS DIRECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD . 3.6.1 IN CONFORMITY WITH THE ABOVE FINDING, WE DIRE CT THE AO/TPO TO CONSIDER THE FOREIGN EXCHANGE GAIN OR LOSS AS PART OF THE OPERATING COST OR REVENUE, AS THE CASE MAY BE, FOR BOTH THE ASSESSEE AS WELL FOR THE COMPARABLE COMPANIES. 4. M/S S NARENDRA VS. ADDL CIT [ITA NO. 6839/MUM/2 012] 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. THE PROPOSITION THAT GAIN ON FOREIGN EXCHANGE IF IT RELATES TO THE BUSINESS OF THE ASSES SEE IS PART AND PARCEL OF OPERATING INCOME IS WELL ESTABLISHED BY T HE AFORE-MENTIONED DECISIONS OF THE COORDINATE BENCHES. IN THE PRESENT CASE, NOTHING HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT THE GAIN MAD E BY THE ASSESSEE ON FLUCTUATION OF FOREIGN EXCHANGE WAS NOT ON ACCOUNT OF BUSINESS TRANSACTIONS OF THE ASSESSEE. IN ABSENCE OF ANY SUCH MATERIAL, F OLLOWING THE AFORE- MENTIONED DECISIONS OF THE TRIBUNAL, IT HAS TO BE H ELD THAT THE FOREIGN EXCHANGE GAIN OF THE ASSESSEE IS TO BE CONSIDERED A S PART AND PARCEL OF THE PROFIT OF THE ASSESSEE AND THEREFORE SHOULD BE INCL UDED FOR THE PURPOSE OF COMPUTING THE PROFIT MARGIN OF THE ASSESSEE. 5. M/S TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCIT [ITA NO. 1054/BANG/2011] 79 A 1. TREATING FOREIGN EXCHANGE GAIN OR LOSS AND PROVISIO N FOR BAD DEBTS AS NON- OPERATING IN NATURE AND FRINGE BENEFIT TAX AS PART OF OPERATING COST: AS FAR A FOREIGN EXCHANGE GAIN/LOSS BEING CONSIDERED AS NOT FORMING PART OF THE OPERATING COST, THE REASONING OF THE REVENUE IS THA T SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM INTERNATIONA L TRANSACTION THOUGH THEY MAY FORM PART OF THE GAIN/LOSS OF THE ENTERPRI SE AND THEREFORE THEY SHOULD BE EXCLUDED WHILE DETERMINING OPERATING COST . ON THE ABOVE ISSUE WE FIND THAT THE BANGALORE BENCH OF ITAT IN THE CAS E OF SAP LABS ITA NO.983 /MDS/2014 12 INDIA (P) LTD. VS. ACIT (2011) 44 SOT 156 (BANG.) H AS TAKEN THE VIEW THAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRE D TO BE ADDED TO OPERATING REVENUE. FOLLOWING THE SAME, THE AO IS DI RECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD. 6. M/S SAP LABS INDIA (P) LTD. VS. ACIT [2011, 44 SO T 156, BANG] 42. WE CONSIDERED THE ISSUE CAREFULLY. THE FOREIG N EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THIS PROPOSITION HAS B EEN TIME AND AGAIN CONSIDERED IN CASES ARISING IN THE CONTEXT OF SECTI ON 80HHC. THE COURTS AND TRIBUNALS HAVE HELD THAT FOREIGN EXCHANGE FLUCT UATION GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE. USEFUL REFE RENCE MAY BE MADE TO THE DECISIONS OF BOMBAY HIGH COURT IN THE CASE OF S HAH BROS. V. CIT, [2003] 259 ITR 741; THAT OF GUJARAT HIGH COURT IN T HE CASE OF CIT V. AMBA IMPEX [2006] 282 ITR 144 AND THAT OF MUMBAI ITAT SP L. 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 YEA R OF DEDUCTION ON THE ACCEPTED PROPOSITION THAT THE FOREIGN EXCHANGE FLUC TUATION GAINS COMPUTED BY AN ASSESSEE IN A RELEVANT PREVIOUS YEAR SHOULD B E 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 OPER ATING MARGIN OF THE ASSESSEE-COMPANY. THIS CONTENTION OF THE ASSESS EE IS ACCEPTED . THEREFORE FOLLOWING THE DECISION OF THE TRIBUNAL AN D THE SPECIAL BENCH OF THE TRIBUNAL AND FOR THE REASONS DISCUSSED HEREINABOVE, WE HEREBY HOLD THAT PROFITS OR LOSS ARISING OUT OF FOR EIGN EXCHANGE ITA NO.983 /MDS/2014 13 FLUCTUATIONS HAS TO BE TAKEN INTO CONSIDERATION WHI LE ARRIVING AT THE OPERATION COST IN TRANSFER PRICING MATTERS. ACCORDI NGLY, WE HEREBY SET ASIDE THE ORDER OF THE LD.DRP AND UPHOLD THE ORDER OF THE LD. ASSESSING OFFICER WHO HAS ONLY ADOPTED THE ORDER OF THE LD.TPO. 8. IN THE RESULT, THE APPEAL OF REVENUE IS ALLOWED. ORDER PRONOUNCED ON 17 TH JULY, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 17 TH JULY, 2015. K S SUNDARAM. & (,/0 1 0#, /COPY TO: 1. $% /APPELLANT 2. ()$% /RESPONDENT 3. * 2, ( ) /CIT(A) 4. * 2, /CIT 5. 05 (,6! /DR 6. ' 7+ /GF